A Visual Demonstration of the 200D SMA as a Reliable Volatility Indicator (With 2026 S&P 500 Price Outlook)

**Preface:** I have been using the 200D SMA strategy for over a year with UPRO. All the "risk on" and "risk off" mentions in this post are about the 200D SMA as a risk on (above SMA) and risk off (below SMA) indicator. I also employ 3% bands above and below the SMA. Risk on occurs when there is a daily close above the top band, and risk off occurs when there is a daily close below the bottom band. If price moves within these bands, I do nothing and keep holding the most recent position. I do this to reduce trades per year to 0.87 since 1978, and to increase win rate to over 85%. Purely using the 200D SMA results in an abysmal win rate, which is terrible for investor psychology in my opinion. The main reason the 200D SMA is a useful indicator is not because it perfectly predicts price action. Since 1978, if you bought the S&P 500 whenever it went under its 200D SMA and switched to cash whenever it went above the 200D, you would still have a 4.5% annual return. If you bought the index only when the price was above the SMA, and switched to cash when under, you would have a 12% annual return. Granted, that 4-5% return would include horrific 20% volatility and 40%+ drawdowns, even with no leverage. I compiled every single day since 1978 where the S&P 500 was above its 200D SMA and looked at the average return of all those days in the following 12 months, as well as volatility (standard deviation). I then compared those risk on stats to the returns and volatility of all days where the S&P 500 was below its 200D SMA (risk off). The results are stunning, but not how you would expect. Firstly, the average forward 12 month return of the S&P 500 when risk on vs. risk off. This is not to be confused with overall CAGR of the S&P 500 above and below the 200D SMA. These stats are looking at every single day that the S&P 500 was risk on or off, and then looking at the following 12 months of returns, and then averaging them out. **Above 200D SMA (Risk on): 13.48% average 12 month forward return.** **Below 200D SMA (Risk off): 13.27% average 12 month forward return.** Next up, volatility, also known as standard deviation. If you aren't aware of the math on standard deviation, do a bit of research and come back to this post. In short, about 68% of 12 month returns fall within 1 standard deviation of the average annual return. About 95% of 12 month returns fall within 2 standard deviations of the average annual return. For example, if an asset's average annual return is 10%, and its standard deviation is 10%, about 68% of years will fall between a 0% and +20% return. 95% of years will fall between a -10% and +30% return. Here are the average standard deviations of the S&P 500 when risk on and off, using the 200D SMA as the indicator. **Risk on: 13.86% standard deviation** **Risk off: 23.23% standard deviation** The S&P 500 is nearly twice as volatile when risk off. To demonstrate this visually, compare chart 1 and 2 on this post. Chart 1 shows the range of expected returns of the S&P 500 in 2026 if indicating risk on (S&P 500 being above 200D SMA). Chart 2 shows the range of expected returns of the S&P 500 if indicating risk off (S&P 500 being below 200D SMA). [](https://preview.redd.it/a-visual-demonstration-of-the-200d-sma-as-a-reliable-v0-00b3pe60mddg1.png?width=2898&format=png&auto=webp&s=7cfb47cd5e35c07077aafcfe589c0dfb871072b2) [Chart 1 - Range of Expected Returns of the S&P 500 When Risk On](https://preview.redd.it/fg9j2dblsddg1.png?width=2898&format=png&auto=webp&s=5a3b341792018cf233daf4ff0c0b47a1b40ebe87) [](https://preview.redd.it/a-visual-demonstration-of-the-200d-sma-as-a-reliable-v0-1d2vtwu8nddg1.png?width=2894&format=png&auto=webp&s=f4a89ea6b82957422ee2eaee5e924cc98e1c42ec) [Chart 2 - Range of Expected Returns of the S&P 500 When Risk Off](https://preview.redd.it/xvy7vr7nsddg1.png?width=2894&format=png&auto=webp&s=330ff7a82e965c8cb655f267d7d4f99901fa637a) You may notice that the average, labeled as "Target" in Blue is around the same for both charts. This simply means that no matter if the S&P 500 is below or above its 200D SMA, when you go forward 12 months, the average annual return is the same. In other words, the actual 12 month forward return is nearly impossible to predict using the 200D SMA. However, volatility is very easy to predict using the 200D SMA. The risk on 2026 S&P 500 price prediction has a 95% chance of being between 6,120 and 9,300. The risk off 2026 S&P 500 price prediction has a 95% chance of being between 4,740 and 10,133. That is a much larger spread than the risk on prediction. The difference is just over 3,000 S&P 500 points for the risk on prediction. Meanwhile, the risk off prediction has a range of almost 5,500 S&P 500 points! I created this as a way to show people that it's basically impossible to time the direction of the market, but so easy to predict volatility. If you aren't switching to cash when the market goes under its 200D SMA, it seems clear that you should at least be de-leveraging Let me know what you think!