This article is an update to one I wrote a while back titled, “If it’s November, I Must Like Technology” (11/9/2005). Some investors seem to crave complex trading methods. The more calculations, indicators, oscillators, bands and wave counts involved, the better. Others yearn for simplicity. “Just tell me what to do and let’s get on with it” is their credo. The topic today will definitely appeal to the latter.

In a nutshell, the “system” in question – such as it is – involves buying and holding only one sector fund (or cash) per month. I originally devised this method in early 2000 (so Murphy’s Law being what it is, the system of course experienced its first losing year that year. But I’m not taking it personally. I mean, so what if Murphy hates my guts even though I never did anything to him?!) as a simple means to put some money into the market without having to think too much. To make a long story short, if we assume a starting point of January 31st, 1999, the system has gained 245% versus a loss of -36% for the S&P 500 during the same time. Of course, as with any relatively aggressive investment method the returns generated were not achieved without some volatility.

The Funds

I originally devised the system using Fidelity Select Sector funds and they can still be used as long as you are very careful about timing your trades so as not to violate their increasingly militant approach towards switching rules. Just between you and me, they’re getting a little cranky over there at Fidelity about switching into and out of sector funds. Rumor has it that if you go into a room full of Fidelity marketing people and say the phrase “iShares” most of the cringe like someone just hit them in the head with a ball peen hammer (Although come to think of it, this may have been a rumor that I started myself, so maybe take it with a grain of salt.) Other possibilities now include the multitude of ETFs and open-ended sector funds offered by ProShares, iShares, SPDR, Rydex and Profunds to name a few (the marketing people are staying up late).       

Table 1 displays the favored sector for each month of the year.

Table 1 – Favored Sector by Month

As I mentioned there is now a myriad of investment vehicle possibilities. Table 2 spells these out a bit more clearly.

Table 2 – Alternate fund choices

The System

It seems like a bit of a stretch to refer to this as a “system” although it technically fits the bill as all rules are known in advance. It’s just that the rules are so simple. At the close on the last trading day of every month simply make sure to switch into the appropriate sector for next month. Then get on with your life (ah, there’s the rub) for another month.

The Results   

Table 3 displays the annual results.

Table 3 – Year-by-Year Results

A few notes of interest:

• The system has showed a profit in 17 of 20 years versus 13 of 20 years for the S&P 500.
• The system outperformed the S&P 500 in 14 of 20 years.
• The median annual gain for the system was +21.7% versus a median gain of +6.0% for the S&P 500.
• $1,000 invested using the system would presently be worth $89,332. $1,000 invested in the S&P 500 over the same time would presently be worth just $2,565.
• If one started using this method at the end of November 2005 after  I first wrote about it, $1,000 would be worth $1,390 versus $720 invested in the S&P 500 (i.e., up +39% versus down -28%).

Chart 1 displays the growth of $1,000 on a month-by-month basis for the system since 10/31/1989. As you can see, for long stretches of time the equity curve for the system moved relentlessly higher. The system took its lumps between 2007 and 2009, suffering a 34% drawdown along the way. Unlike the S&P 500 however, the system has recovered well in recent months and is presently about 7% off of its all-time high (versus the S&P 500 which is still 42% below its all-time high).

 

Chart 1 – System Equity Curve 10/31/89-6/24/09

Summary

So in the end the obvious question is, “is this a viable approach to investing?”  And from there an interesting discussion could be had. Some would argue that the lack of any kind of stop-loss provisions, the 34% drawdown experienced last year and the fact that the favored sectors will simply not always perform as “expected” make this system un-tradable. Still, others might argue that the 21% per year median return, the ridiculous simplicity and the fact that the system bounced back as strongly as it did make this a very viable investment method.

So who is right and who is wrong?  As always in investing there is no right or wrong. “Youse pay youse money, youse take youse chances.”  Nevertheless, for someone willing to devote a portion of his or her capital to a simple-to-use method, the potential benefits are worthy of consideration.     

As always, time will tell.

Jay Kaeppel
Staff Writer and Author of Seasonal Stock Market Trends
Optionetics.com ~ Your Options Education Site

Questions for Jay? Please visit "Ask the Traders" through the discussion board on the Optionetics.com home page.

NOTES: 

To learn more about Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing, please click here.

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