Cycle Trading

[JLS]

StockCharts.com:

Historical Price Data is Adjusted for Splits, Dividends and Distributions.

In addition to performing adjustments that remove large gaps caused by splits, we also adjust our historical data to remove smaller gaps caused by dividends and distributions. By making these additional adjustments, we ensure that all price movements on our charts are caused by pure market forces - i.e., the forces that Technical Analysis attempts to identify.

While these adjustments are very important for accurate technical signals, they can cause problems in the following circumstances: Our historical price data cannot be used to determine the actual buy or sell price for a stock at some point in the past.

http://tinyurl.com/j5mkaxb

With regard to SPY, which does have dividends, but does not have splits ...

My interpretation of those statements above (by StockCharts.com) is that evaluation of trading methods over a long time interval, such as many years, are not going to be representative when dividends are involved, especially for backtesting which typically uses a large historical range. But, StockCharts provides a mechanism for disabling adjustments for dividends and distributions by placing an underscore ahead of the symbol. For instance; for backtesting, one should probably use _SPY instead of SPY.

So, let's see how that works for a backtest that goes back to the year 2000.

Use the following link to pull up a chart of SPY. Look at the prices, then edit the link in your browser to replace "SPY" with "_SPY", to take out dividends, then look again. The MA crossover at the bottom which was at about $67 becomes a crossover at about $88. That's about a 31% change just for turning dividends ON or OFF. That means that the trading method is about one-third less effective when dividends are taken out.

http://stockcharts.com/h-sc/ui?s=SPY&p=D&st=2000-01-03&en=2005-01-03&id=p09495563639

With regard to Method 5 (M5), it appears (in hindsight) that it wouldn't make much money prior to April 2003 if it is a Long-only system. If one simply buys SPY at about $67 in 2003, and still owns it today, at about $235, then it has increased 351%, for a gain of 251%, and a very significant part of that gain is due to dividends, not just stock price increase.