Interesting post. I've thought about programmatically using the fear and greed index to set allocations on betterment.com. A few things to remember with the benchmark are:
1.) Dividends: When you sell your positions you are no longer earning them - I don't think this benchmark is including dividends which are currently 1.86% annually with SPY
2.) Taxable events: When you sell, you will have to pay capital gains, in most cases short term. Deferring taxes usually works to your advantage in the long run
3.) Commissions: Although this can be mitigated with an commission free ETF broker.
Instead of selling completely, I wonder what the returns would be like if you basically set tactical allocations instead:
During times of greed switch to 90% bonds, 10% stocks: F&G index over 80
During times of fear switch to 10% bond, 90% stocks: F&G index below 20
For everything else, keep it 50/50 and re-balance quarterly
I suspect this will fail to beat the market, due to the large bond holding. However your volatility will be greatly reduced. Reducing volatility drag is one way to beat the market (if you can do it).
Perhaps a mix if 70% stock, 30% bonds during the times the F&G index is between 20 and 80.
There are tons of books out there that espouse the virtues of passive investing so I won't go into that, but thanks to Gus for doing this test. Fascinating.