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Understanding How Seasonal Market Strategies Work!

  • Written by Syndicated Publisher No Comments Comments
    April 13, 2013

    It’s that time of year when I remind you of the market’s remarkable history of annual seasonality.

    It’s been proven beyond doubt that the market tends to make most of its gains in the winter months between November and May, and if there is to be a correction in any given year it almost always takes place in the May to November period.

    Numerous academic studies of the market going back many decades have confirmed that even though there is not a correction every year, an investor who simply bought the Dow or S&P 500 via an index mutual fund or etf on November 1 each year, and moved to cash on May 1 outperformed the market over the long-term by a significant amount.

    Does that mean it outperforms the market in every individual year? No. But then there is no strategy that does, most particularly a buy and hold strategy.

    Yet in spite of years of proof piling up, investors and the financial media still struggle with the thought of such simplicity outperforming the market, and therefore the majority of mutual funds and professional money-managers, and doing so while taking only 50% of market risk (out of the market 6 months each year).

    Even many of those who happily benefit by following it don’t always remember that it is strictly a mechanical strategy. One of its most important attributes is that it avoids the problem that most often harms performance, the intrusion of the emotions of fear or greed.

    Each year there are reasons to think that this time is different, that seasonality won’t work. In the fall, as the re-entry date approaches the emotion is usually fear. There has often been a summer correction brought on by worrisome conditions that have investors and the media expecting more downside. In the other direction, by the time the exit date approaches in the spring there has usually been an impressive favorable season rally that has reversed sentiment, convincing many that this time is different, that seasonality will not be a factor, that the market will most likely continue to climb through its unfavorable season.

    And there are just enough years when that does happen to keep investors and the media skeptical, describing seasonality as ‘iffy’, and those following the strategy tempted to allow short-term emotions to interfere. By delaying entries or exits, or more likely this year exiting prematurely, they negatively affect the performance of the strategy for themselves.

    There is a variation of seasonality that incorporates what is going on at the time each year, but still avoids emotional reactions to headlines and surrounding conditions.

    Recognizing that the market does not launch into a new rally on the same day each fall, or top out on the same day in the spring, in 1999 my advisory service introduced what we call our Seasonal Timing Strategy to the public.

    It maintains the mechanical aspects of Sell in May, avoiding emotional input, but incorporates a simple and well-known short-term technical indicator, MACD, to identify whether the market is still in correction mode when the entry date arrives in the fall, and whether it is still in rally mode when the calendar exit date arrives in the spring. If MACD is still on a sell signal in the fall the entry is delayed until it triggers its next buy signal. In the spring if MACD is still on a buy signal when the calendar exit day arrives the exit is delayed until MACD triggers its next sell signal.

    The result is a seasonal strategy that allows whatever is going on at the time, primarily whether the market remains in rally mode or not, to influence the entries and exits, while maintaining the mechanical aspect that avoids usually wrong emotional input. Over the last 15 years this simple but effective improvement resulted in entries as early as October 16 and as late as November 28, and exits as early as April 20 and as late as May 16, and with performance that substantially beat not only the market but the impressive Sell in May strategy.

    When it was introduced in 1999, Yale Hirsch, developer of the original Sell in May strategy in the 1970’s, praised it in his Stock Trader’s Almanac, did some further research on it and reported in the Almanac that “Back-tested over the last 51 years, the strategy more than doubled the already outstanding performance of the basic ‘Best Six Months’ (Sell in May) strategy”, and he adopted my strategy as a replacement for his ‘Best Six Months’ strategy in his newsletter.

    Mark Hulbert, well-known for his performance-tracking newsletter The Hulbert Financial Digest, has been tracking it since 2002, and has reported of it more than doubling the performance of buy and hold over the long-term while taking only 61% of market risk.

    So there are ways, or at least one way, to tinker with seasonality, by incorporating a technical momentum indicator. But tinkering with it by allowing emotional nervousness to result in delayed entries and premature exits, or emotional confidence to convince you that this time is different and seasonality can be ignored, may work in some years. But history says it won’t work over the long-term.

    By the way, the earliest exit date of my version of seasonality (April 20) is approaching, and short-term MACD is on a buy signal. Whether short-term market momentum keeps it on that buy signal will determine whether the exit is signaled at that time or not.

    Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost

    (Sy was recently awarded the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year) award, and now in 2013 has moved up from being the #2 Long-Term Stock Market Timer for 2012 to being #1 Long-Term Stock Market Timer).

    Images: Flickr (licence attribution)

    About The Author

     

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

     

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