Our long-time proven Seasonal Timing Strategy™ (STS).
Introduced in 1998, over the last 14 years our STS has gained 213.0% to year-end 2012 compared to a 92.7% gain for the Dow, a 49.2% gain for the S&P 500, and a 37.7% gain for the Nasdaq.
A chart is often more understandable than a a table. KEEP IN MIND THAT THIS PERFORMANCE WAS ACHIEVED WHILE TAKING ONLY 50% OF MARKET RISK SINCE IT IS OUT OF THE MARKET COLLECTING INTEREST ON CASH ROUGHLY 6 MONTHS EACH YEAR. The strategy could therefore be followed using 2:1 leveraged etf's when invested, which would only bring it up to the equivalent of 100% market risk. (The performance figures shown are for our actual portfolio, which does not use leveraged positions).
Our Seasonal Timing Strategy (STS) had similar results back-tested to 1970 (with the final 14 years having been in real time in our newsletter, since being introduced to the public in 1998).
For years our subscribers have been raving about what our STS has done for their financial health, as well as their mental health (by avoiding the stress of periodic large losses).
But sometimes a non-subscriber thinks he or she has discovered a flaw, and says, "Your STS doesn't work. It under-performed the market in 2003, 2006, and 2009." A few financial columnists have also written that "The market's seasonal pattern is an iffy thing. Sometimes it doesn't work."
Those are off the top of the head observations made with no research or fact-checking involved.
Yes, it's true that STS did not outperform the market in 2003, 2006, or 2009. But you know what? There is no strategy (nor even the world's best-known investors or money-managers) that beat the market in every individual year. Buy and hold investors have certainly learned that the hard way.
Yet when STS under-performed the market in 2003 and 2006 it still made double-digit gains. While it also underperformed the market in 2009, it was down only 4.2%.
Meanwhile, when the market on a buy and hold basis periodically has bad years it has serious losses. Just look at the individual years of 2000, 2001, 2002, 2008 in the table at the top. Most of those losses take place in the market's unfavorable season and so are avoided by seasonal investors. Yet in the great bull market year of 1999 our STS strategy also outperformed both the Dow and S&P 500.
As the above table shows, the fact that the market's seasonality varies from year to year does not change its long-term performance or consistency. Nor does it change the fact that it makes its long-term gains while taking only roughly 50% of market risk (since an investor is only in the market from 5 to 7 months each year, and safely on the sidelines collecting interest on cash for the rest of the year).
Here is the performance reported by Mark Hulbert who started tracking our strategy in 2002. (He would have found the performance even more impressive if he had begun to track it sooner so as to include the bear market of 2000-2002.
"The two market-timers' have strategies for improving the 'Halloween Indicator' [Sell in May and Go Away] that are quite similar - at least in theory. Both rely on the MACD indicator to decide when (if at all) to get the buy and sell signals. Despite the similarities, the two strategies have significantly different returns. This is well illustrated by the accompanying table, which reflects Hulbert Financial Digest data for these two strategies' returns back to mid-2002, calculated on the assumption that when they are invested they obtain the return of the Wilshire 5000 total-return index; otherwise they are assumed to be invested in 90-day T'bills."
It's another report that confirms that our Seasonal Timing Strategy more than
doubles the performance of buy & hold over the long-term, and with considerably
It's another report that confirms that our Seasonal Timing Strategy more than doubles the performance of buy & hold over the long-term, and with considerably less risk.
Additionally, when a buy and hold investor, or a follower of any other strategy, has an under-performing year it is not a case of merely making a decent but smaller profit, or a small single-digit loss, as with our Seasonal Timing Strategy, but a case of periodic huge losses that often require years to get back to even.
Even 'best investor in the world' Warren Buffett has periodic individual years of large double-digit losses. But not STS, at least not in 53 years (40 years of back-tested data, and 13 years of real-time use in our newsletter).
The following chart of Buffett's holding company, Berkshire Hathaway, shows its five double-digit losses of up to 53% over the last 13 years. It took Buffett almost 5 years to get back to even from its 49.7% decline from its 1998 peak. And Buffett has still not recovered from his last 53% and 22% declines.
Buffett has one of the best performance records in history. Yet over the last 13 years of its real-time existence, our STS outperformed him by a wide margin, gaining 190.6% since Dec. 31, 1998, while Buffett is up 78% for the same period. And our STS strategy had no serious declines for investors to live through, while Buffett's investors had several severe plunges.
So STS is a strategy that not only significantly outperforms the market, but has beaten 'the best investor in the world' - yet involves only two trades a year and takes only about 50% of market risk (in the market only four to seven months a year!
WHAT MAKES OUR SEASONAL TIMING STRATEGY WORK?
For many decades it's been well known that markets around the world have made most of their gains in a 'favorable season' that runs from roughly November to May, and have suffered most of their losses in an 'unfavorable' season' that runs roughly from May to November. Thus the old-time market maxim 'Sell in May and Go Away'.
It has been proven not only in our substantial research, but in numerous academic studies over the years.
For instance, a 27 page academic study by Professor Ben Jacobsen, of the Rotterdam School of Management, Rotterdam, The Netherlands, and Sven Bouman of Aegon Asset Management, in the Hague, Netherlands, published in the American Economic Review in 2002 concludes, “Surprisingly we found this inherited wisdom of Sell in May to be true in 36 of 37 developed and emerging markets. Evidence shows that in the UK the seasonal effect has been noticeable since 1694.”
The Jacobsen study noted that, “A trading strategy based on this anomaly would be highly profitable in many countries. The annual risk-adjusted outperformance ranges between 1.5% and 8.9%, depending on the country being considered. The effect is robust over time, economically significant, unlikely to be caused by data-mining, and not related to taking excess risk.”
A 2008 academic study at the New Zealand Institute of Advanced Study, devoted solely to seasonality in the U.S. stock market, and published in The Financial Review, concluded that, "All U.S. stock market sectors, and 48 out of 49 U.S. industry sectors, performed better during winter than summer in our sampling from 1926-2006.”
We included above a 2011 study by Market Hulbert of the Hulbert Financial Digest that shows the simple Sell in May pattern almost doubled the market since 2002.
When to sell is only half of an investing strategy. When to buy is obviously just as important. So the other half of the 'Sell In May' maxim, when to buy, was originally ‘Buy back on St. Leger Day’, which refers to an old-time horse race run in England in September each year. However, the seasonal pattern has also been referred to as the 'Halloween Indicator', on the premise that one should buy back on October 31.
But, obviously the market does not begin or end a rally on the same day each year. The month-end dates were used in the studies simply to determine if the market has a pronounced and consistent seasonal pattern, and concluded that it most definitely does.
We began our research into seasonality in early 1998, as an effort to develop a simple mechanical investment strategy that would work in both bull and bear markets, so it could be offered in my planned 1999 book Riding the Bear – How to Prosper in the Coming Bear Market, as the strategy that would allow an investor to continue making gains in the 1990s bull market, and keep those gains, and then make more in the severe bear market our work was telling us to expect. (The severe 2000-2002 bear market began just a few months after the book was published).
We began by back-testing a hundred years of market data, with the goal of determining the exact days of the year, rather than the end of a month, that on average would produce the best entry and exit dates for investing according to the market’s seasonality.
We discovered that those best days on average are October 16 for the entry into the market for its favorable seasonal period, and April 20 for the exit from the market’s favorable season. However, those are just the best days as averaged over a very long time period.
And again, obviously the market does not begin a rally on the same day each year, or begin to decline from a top on the same day each year. And recognition of that obvious fact is the most important aspect of our strategy.
So we then concentrated on determining a means by which the entries and exits could be more accurately pinpointed for each individual year.
The result was our Seasonal Timing Strategy, or STS.
We combined the market’s best average calendar entry and exit day with a technical indicator, the Moving Average Convergence Divergence indicator, or MACD. It is a short-term momentum-reversal indicator developed by Gerald Appel in the 1980s, designed to signal when the market has begun either a short-term rally, or a short-term correction.
Our STS rules say that if a rally is underway when the October 16 calendar date for seasonal entry arrives, as indicated by the MACD indicator, we will enter at that time. However, if the MACD indicator is on a sell signal when the October 16 calendar entry date arrives, indicating a market decline is underway, it would not make sense to enter before that decline ends just because a calendar date has arrived. Instead, our Seasonal Timing Strategy simply waits to enter until MACD gives its next buy signal, indicating that the decline has ended.
We use the same method to better pinpoint the end of the market’s favorable period in the spring. If MACD is on a sell signal when the calendar exit day of April 20 arrives, we issue the exit signal at that point. However, if the technical indicator is on a buy signal, indicating the market is in a rally when April 20 arrives, it makes no sense to exit the market just because the calendar date has arrived. So our Seasonal Timing Strategy’s ‘exit rule’ is to simply remain in the market until MACD triggers its next sell signal indicating the rally has ended.
Using this strategy we are able to take advantage of the fact that although the market’s favorable and unfavorable seasonal periods average approximately six months each, they actually vary significantly from year to year, sometimes being as brief as four months, other times lasting as long as seven months.
The following chart demonstrates our Seasonal Timing Strategy applied to the DJIA, and how well it worked even in the strong bull market years of 1997-1999, to have investors in for the 'favorable' seasonal periods when the market usually makes most of its gains each year, and out for the 'unfavorable' seasonal periods when the market tends to suffer most of its declines (whether it is in a bull or bear market).
did it make good gains in its favorable seasons in those bull market years, but
intermediate-term corrections which often take place during the unfavorable
summer months even in the best of bull market years.
The chart shows the action of the DJIA from mid-1997 to mid-1999, which encompasses two of the market’s favorable seasonal periods. The lower window of the chart shows the DJIA itself, while the upper window shows the MACD indicator.
The vertical lines are the calendar entry days of October 16, and the calendar exit days of April 20 the following year.
Note at the left end of the chart that when October 16, 1997 arrived MACD was on a sell signal. The entry rule of STS is that we are not to enter until MACD triggers its next buy signal. As indicated by the up-arrow that did not take place until mid-November.
When April 20 of 1998 arrived, MACD was on a buy signal. The STS exit rule is that we therefore are not to exit until MACD triggers its next sell signal, which in this case was just a few days later, and actually at a lower price than had we used the calendar date.
Moving on to the entry in the fall of 1998, when October 16 arrived, the earliest entry date acceptable to STS, the MACD indicator was already on a buy signal, so we would enter at that point.
However, when the exit date of April 20 arrived the following spring MACD was on a buy signal, meaning the exit would be postponed until MACD triggered its next sell signal. That did not occur until mid-May, providing almost an extra month of higher prices before STS signaled that the market’s favorable seasonal period was over.
Note that MACD, like the calendar dates, does not get an investor in at the exact bottom in the fall, nor out at the exact top in the spring. No strategy could possibly do that. But MACD does most often provide a better entry and exit than simply using the calendar, and, as shown in the yellow table at the top of this article, produces market-beating gains over the long-term by avoiding most serious market corrections and then getting back in at a lower level.
Since risk management is an essential part of money management it’s also important to note that by using an etf or mutual fund that tracks with the DJIA index, seasonal investing completely avoids individual stock risk, and sector risk, and even significantly decreases market risk, by only be in the market roughly half the time, and safely earning interest on cash during the highest risk period (the market's unfavorable season).
STS publicly in my 1999 book Riding the
Bear - How to Prosper in the Coming Bear Market.
applied Harding's system, which he developed based on the Dow's seasonal
pattern, to the S&P 500. The results were astounding!" Smart
Money, July, 1999
also included the following in their year 2000 edition of The Stock Traders Almanac.
over the last 51 years, the strategy more than doubled the already outstanding
performance of the basic 'Best Six Months' seasonal strategy."
Bloomberg Personal Finance Magazine reported;
simple but also remarkably profitable, at least in the hands of a disciplined
practitioner like Sy Harding, editor of StreetSmartReport.com."
The Hirsch's were so impressed that they took my STS system as their
own, replacing their 'Best Six Months Strategy' which was based on the simple
Sell in May and Go Away pattern, with my strategy and calling it their 'Best Six
Months plus MACD Strategy'. Thus did Mark Hulbert discover there are two
newsletters using 'quite similar' seasonal strategies.
The Hirsch's were so impressed that they took my STS system as their own, replacing their 'Best Six Months Strategy' which was based on the simple Sell in May and Go Away pattern, with my strategy and calling it their 'Best Six Months plus MACD Strategy'. Thus did Mark Hulbert discover there are two newsletters using 'quite similar' seasonal strategies.
What Creates the Seasonal Pattern?
Why would the market move in such consistent seasonal patterns regardless of the surrounding economic and political conditions?
Academic studies have been unable to find the cause of the annual seasonality, only that it is remarkably consistent, has been consistent for several hundred years, and unlike many other patterns has remained robust even after becoming well-known, is not related to 'data-mining', and its performance is not due to taking excess risk, indeed is exposed to only 50% of normal market risk.
Obviously, the pattern is created by changes in the amount of money flowing in or out of the market. Academic studies have explored the possibility that summer vacations are the primary influence, that volume tends to dry up in the summer months when investors are on vacation and for other reasons are also not as interested in the markets and investing. But then they find that not supported when one realizes that summer months and the vacation seasons are opposite in the northern and southern hemispheres, and yet the countries in both hemispheres experience the seasonal pattern at the same time of year.
We have believed that in the U.S. anyway, that as the market enters the fall season, investors begin receiving large chunks of extra cash most of which is automatically invested in the market. For instance, most mutual funds have fiscal years that end September 30 so they can get their books closed and make their capital gains and dividend distributions to their investors in November and December. Most mutual fund accounts are marked for automatic re-investment of dividends. Additionally, third and fourth quarter dividend distributions from corporations are paid to investors in the period between November and March. Most dividends are marked for automatic re-investment. Employers make their contributions to employee profit-sharing plans, and year-end contributions to their employees’ 401K and pension plans. Those are automatically invested in the market.
there are Christmas bonuses, year-end bonuses, income
tax refunds in the spring, etc. Highly paid hedge-fund managers collect
their large year-end fees at the end of the year. Small business owners close
their books at the end of each year, and by February or March their accountants
let them know what their profits were, and they then distribute those profits to
And much of that extra cash finds its way into the stock market.
Wall Street institutions, money-management firms, and
knowledgeable investors, aware of the market's seasonal tendency, also begin
buying more heavily in October, in anticipation that the market will make
its usual impressive gains in the favorable season.
However, in the spring of the year that huge flow of extra money into the market dries up, with income tax refunds being the final act.
That creates a
sizable decrease in buying pressure, which allows whatever selling there is to
have more influence on the direction of the market. It also deprives investors of the extra money
they were getting in the favorable season to buy the dips, which might
otherwise prevent a market decline from taking place.
In addition, Wall Street institutions, money-management firms, and knowledgeable investors, aware of the frequent effect of the market's unfavorable season on stock prices, take profits from the favorable season and lighten up on holdings for the summer months. Interest in the market also diminishes significantly as many investors and traders go off on vacations. That can be seen in the way trading volume dries up significantly during the ‘summer doldrums’.
Granted, that only explains the possible cause of seasonality in the U.S. and countries with similar profit-sharing plans and other seasonal money flows. But then there is also what we believe is the tendency for global markets to move in tandem with the U.S. market, which would have the seasonality of the U.S. market contribute seasonality to global markets.
In any event, as the academic studies show, and our own research revealed through back-testing over the previous 50 years, and our subscribers' experience with our Seasonal Timing Strategy in real-time over the last 10 years has revealed, no matter what the cause may be, stock markets move in a very clear, robust, consistent, significant annual seasonal patterns, which harnessed as a strategy doubles, triples, and quadruples the performance of the market over the long-term. with its underperforming years producing only minor declines.
BEFORE CONTACTING US WITH QUESTIONS PLEASE FIRST READ
THE ANSWERS TO THE FOLLOWING 'FREQUENTLY ASKED QUSTIONS'.
introducing our Seasonal Timing Strategy to the general public in Riding
the Bear in 1999, we have received hundreds of letters with good questions.
What were the worst down-years you encountered in back-testing the strategy?
There have been only seven years since 1970 in which the strategy was down for the year. The worst of those declines was the 3.6% decline in 2008, in the midst of one of the worst bear market years since the 1929 crash, and the 4.2% decline in 2009. Prior to that the worst decline for a year was 2.5% in 1977.
Being in the market only four to seven months each year would have a tax penalty for some investors. Whether that penalty would be serious enough to offset the benefit of tripling, quadrupling, and more the performance of the Dow, S&P 500, and NASDAQ over the long term, is certainly doubtful, but in any event would be difficult to determine in a manner satisfactory to everyone.
Tax rates vary dramatically depending on an investor's tax bracket. Additionally, some states impose additional state taxes on capital gains, while others do not.
Further, Congress changes the tax holding periods and capital gains rates so frequently as to make it difficult to back test an after-tax performance, and impossible to predict what it would be in the future.
However, we can know seasonal timing would have no tax impact on assets in IRAs, 401Ks, Keough plans, and other tax-deferred portfolios. Nor would it have any impact on those already following a strategy of mutual fund switching, or of making portfolio changes to follow changes in market leadership.
It also would not affect those who think of themselves as buy and hold investors, but on looking back at their portfolio activity realize that is not the reality, that they have engaged in a fair amount of switching in and out of holdings anyway for one reason or another.
We also believe seasonal timing would have a positive impact, even considering taxes, for the majority of those who have been led to believe that since ‘the market always comes back’, they should simply buy and hold. It is our contention that they will bail out when losses pile up in the next bear market (if not before when bad news hits the particular stock or mutual fund they have invested in). But they will bail out in disgust near the lows, rather than near the highs that are usually in place by the end of favorable seasonal periods. At least, that is what has happened to the majority of those who became determined buy and hold investors in previous bull markets.
Is your Seasonal Timing Strategy valid only for the DJIA and S&P 500
The Seasonal Timing Strategy was back-tested only against the DJIA and S&P 500 because the Dow data goes back to the late 1800s, while the S&P 500 goes back more than 50 years. So both provide enough data to be statistically meaningful and predictive.
And STS is used as one of our Street Smart Report newsletter portfolios in real-time utilizing only index mutual funds (or exchange-traded-funds (ETFs), on the DJIA and S&P 500 for the same reason.
However, as noted before, in-depth independent academic studies have shown that seasonality shows up in virtually all global markets, (Hong Kong being the main exception), in all U.S. stock market sectors, and in 48 of 49 U.S. industry sectors. So it seems it should be usable on most market indexes or sector mutual funds and etf's.
Since the stock market makes most of its gains in its favorable seasons, most stocks and mutual funds also make most of their gains in the market's favorable seasons. However, individual managed mutual funds were not included in the research for very simple reasons. More than 75% of mutual funds were not in existence even 25 years ago. So there is no way to statistically correlate their past performance with how they might perform in the future. In addition, even if they have longer track records, a change in manager frequently changes the performance.
Have you considered (fill in the blank) as a possible improvement to STS?
In the course of our research we tried many, many variations (several hundred) in our work to optimize the strategy, and what we have is by far the best we could find. For instance, there are technical indicators other than MACD that have been a bit better in specific periods, but were not as consistent over the long haul.
Brokerage firms and mutual fund companies would have a tough time surviving if very many investors were aware of and believed the market's seasonality and moved their money to cash for four to seven months every year. So they must go to whatever lengths they can to distort the information.
Their problem is that numbers don’t lie, they are what they are. So, invariably in trying to refute the very clear proof of the market's consistent seasonal patterns as best they can, these firms distort the numbers, and even outright lie.
In addition, they invariably do not include the interest on cash that a seasonal investor would receive in the unfavorable seasons. That may not seem like much in these times when interest rates are very low. However, over the long-term, interest rates repeatedly cycle between being low and being high, with many periods when they have been in double-digits, when an investor would have added an additional 5% to 6% per year to their profits just in the six months they were out of the market. Leaving interest income out of back-testing historical data is a gross distortion of statistical analysis.
The brokerage firms also usually only say that “the advantage of the seasonal periods is too small to utilize, that one might as well remain invested on a buy and hold basis”. But that is also refuted by independent academic studies.
most importantly, Wall Street’s attempts to refute the market's seasonality
only refer to the calendar-based ‘Sell in May and Go Away’ maxim. They do
not tackle our Seasonal Timing Strategy, which employs MACD to produce seasonal periods that vary from four to seven
months in duration.
It is the combination of the momentum reversal indicator MACD with our more closely defined basic calendar dates that produces the back-tested and real-time performance, in which our Seasonal Timing Strategy has at least tripled the performance of the S&P 500 over the long-term.
Does the fact that STS did not beat the market in 2003
and 2006 and 2009 mean seasonal
timing no longer works?
Please subscribe now so you too can follow the strategy and get its buy and sell signals in a timely manner. You can subscribe very easily online by clicking on the SUBSCRIBE button at the top of the page, and selecting one of the subscription choices. A one year subscription works out to be about the cost of two cups of coffee a week. A very small investment that has the potential to provide such a large long term return.
And you don't get 'just' our Seasonal Timing System. A subscription includes our non-seasonal market timing (which has kept us consistently in the Top Ten Market Timers in the U.S. ranking since 1990), our specific buy, sell, or hold recommendations on stocks, short sales, mutual funds, gold, and bonds, our 8-page investment newsletter, The Street Smart Report, published every 3 weeks (online), its interim hotline updates (every Wednesday evening, more often when needed), a multi-page mid-week short-term and intermediate-term update every Wednesday with charts and commentary, our 'Being Street Smart' articles aimed at keeping you aware of the misleading propaganda from Wall Street, our Street Smart School of on-going seminars on technical analysis, charting, and market timing, AND access to the 'Premium Content' area of our Tuesday, Thursday, and Saturday morning blog at www.streetsmartpost.com. (Check out its free section).
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Please go to Frequently Asked Questions for answers to other questions you might have.
NOTE: This report express our opinions and
suggestions, provided only as a supplement to your own further research and
decisions. We take care to assure accuracy of contents but accuracy is not
guaranteed. Past performance does not imply future results.