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BEING
STREET SMART
By Sy Harding
SELL
IN MAY AND GO AWAY? NOT NECESSARILY! May
2, 2008.
It's
that time again. Twice a year, in the fall and again in the spring, I remind you
of the market's amazing seasonal pattern.
The
market tends to make most of its gains each year in a 'favorable season'
that begins in the fall and ends in the spring, and to experience most of its
serious corrections, bear markets, and crashes in the opposite 'unfavorable
season' that begins in the spring and ends in the fall.
It's
a pattern long known, as indicated by the age-old Wall Street slogan 'Sell in
May and Go Away'.
However,
previous research on seasonality was generalized. Apparently using only month
end research, it determined that to take advantage of the seasonal pattern an
investor should enter the market on October 31 each year and exit on May 1,
staying in cash from May 1 until the following October 31. The result was a
strategy that approximately matched the market's performance over the
long-term, while taking only 50% of market risk (by virtue of being out of the
market six months each year).
However,
we discovered that far from being a six-month in, six-month out seasonal
pattern, the favorable and unfavorable seasons could vary in length from four
months to seven months. And that the
basic calendar days for entries and exits were not at month ends, but on October
16 for the entries, and April 20 for the exits.
But
obviously the market does not begin a rally on the same day in the fall every
year, nor does it begin a correction on the same day in the spring every year.
So
we concentrated on developing a method by which the entries and exits could be
more accurately determined each year. We ultimately discovered that a technical
indicator known as MACD (developed by Gerald Appel in the 1980s) could be used
in combination with the calendar dates to achieve our goal.
The
rule is that if MACD is on a buy signal when the October 16 calendar date for
seasonal entry arrives, we will enter at that time. However, if the MACD
indicator is on a sell signal when October 16 arrives, indicating a market
decline is underway, it would not make sense to enter before that decline ends
just because the calendar date has arrived. Instead, our Seasonal Timing
Strategy waits to enter until MACD gives its next buy signal, indicating 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 exit then. However,
if the technical indicator is on a buy signal, indicating the market is in rally
mode 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 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 the market's
favorable and unfavorable seasonal vary significantly from year to year,
sometimes being as brief as four months, other times lasting as long as seven
months.
The
results? Back-tested over the previous 60 years the strategy significantly
out-performed the market, with just two trades a year and with roughly 50% of
market risk.
In
real-time in my newsletter, over the last nine years (from 1999 through 2007),
the strategy provided a compounded total return of 143%, doubling and
quintupling the compounded return of 72% for the Dow, and 20.9% for the Nasdaq
over the same period. Significantly, it had no down years even in the severe
2000-2002 bear market.
By
coincidence, Mark Hulbert, of Hulbert
Financial Digest fame, has a column on the market's amazing annual
seasonal pattern on Market Watch this
week. I am humbled that the column is devoted mostly to reporting the
performance of my Seasonal Timing Strategy, comparing it to the old 'Sell In
May and Go Away' slogan, as well as to the performance of a well-known
newsletter (which he names) that attempted to usurp my strategy as its own, but
has performance which Hulbert describes as "significantly inferior to
Harding's".
Hulbert
notes that he has only been tracking the performance of my strategy since 2002,
but that during that time it produced a market beating annualized gain of 8.7%,
compared to 6.7% for a buy and hold strategy (and 5.5% for the competing
newsletter that adopted my strategy as its own).
Meanwhile,
Mark notes in his article that our competing newsletter's 'Six Months Plus
MACD' seasonal strategy exited the market in early April, more than 5% below
the market's current level, and the 'Sell in May and Go Away' strategy
would have had you exit on May 1. But he says, "If you are willing to gamble
on a newsletter that has a good track record [on seasonal timing], you will be
giving the market the benefit of the doubt for awhile longer".
And
that is true. My Seasonal Timing Strategy remains fully invested, and could remain so well into May or June.
But
as I warn every spring, we have entered the period when it usually pays not to
become too complacent. The market's next unfavorable season can begin at any
time once April 20 has arrived.
You
can read Mark Hulbert's complete column on MarketWatch
by clicking here. http://www.marketwatch.com/news/story/market-timers-attempt-improve-halloween/story.aspx?guid=%7B7923307E%2D00C4%2D4779%2DAC6C%2D11F8805C99FC%7D&dist=msr_4
Sy Harding is president
of Asset Management Research Corp., DeLand, FL, publisher of www.streetsmartreport.com
and the free daily blog www.syhardingblog.com.
He also authored 1999's timely book Riding The Bear - How To Prosper In
the Coming Bear Market.
He
has a new book out, Beat the Market the Easy Way - Surprising
Seasonal Strategies that Double the Market's Performance. Autographed
copies are available at discount from his website for same day shipment.
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