Mutual Funds As Stock Index Proxies
by Joe Duarte
Both mutual funds and stock indices such as the Standard & Poor's 500 are collections of stocks, but
the}e is a major difference between them. A mutual fund manager changes the stocks in his collection or
portfolio based on his or her perception of the stock market and the investment goals and philosophy of
the fund's charter. The components of a stock index, on the other hand, may remain unchanged for long
The mutual fund's philosophy and its management style, however, smooth out the fluctuations in its net
asset value as a function of time. As a result, as long as the fund's manager and philosophy remain
constant, the fund will usually respond to the market's moves in a similar way in response to market
conditions, much as an index would.
By keeping long-term data of a mutual fund's price action and using technical analysis of the market's
trend, momentum, and the fund's response to market conditions, an investor can achieve fairly consistent
returns by trading mutual funds, much as a stock index trader might.
The combination of a stock index and its moving average is the simplest indicator of a trend change that I
have found. For diversified mutual fund trading, an easily obtainable and excellent indicator is the
Investor's Daily Mutual Fund Index and its 50-day moving average (Figure 1). It is an index of 20 large
diversified stock mutual funds, published five days a week. It charts the daily price over the previous nine
months. If the index moves above the 50-day moving average, it is a buy signal, and if it drops below the
moving average, it is a sell signal. To prevent whipsaws, I confirm the signals provided by the moving
average by using a sentiment indicator.