If there is one thing you can say about me it is that I do, well, kind of go on about seasonal trends in the financial markets. And for that, I offer absolutely no apologies. For there are two things you should know about seasonal trends and how they relate to trading:
First the Bad News: there is no guarantee that even the most reliable repetitive seasonal trend will work the next time around – or the time after that...or the time after that.
Now the Good News: While virtually all investors look at either fundamental data and/or technical data to determine what and when to buy and sell, only a very small percentage of investors ever even consider seasonal trends.
So here is a question - if you are looking for an “edge” in trading or investing, does it make sense to look:
A) Where everyone else is looking?
B) Where hardly anyone else is looking?
So with all of this in mind, this week let me detail a simple seasonal calendar for stock market investors.
Jay’s Simple Seasonal Calendar (JSSC) System
3 Bullish Periods to be in the Stock Market each year:
1) February 18th through May 4th
2) October 27th through November 2nd
3) November 17th through January 7th
The rest of the year is spent in cash
For testing purposes we start on December 31st, 1969. Also for testing purposes, when in cash we assume a nominal rate of interest earned of 1% per calendar year.
The long-term results appear in Figure 1.
Figure 1 – Growth of $1,000 invested using Seasonal Calendar (blue line) versus buying-and-holding Dow Industrials (red line); 12/31/69 to present
Let’s first consider the long-term results.
-$1,000 invested using JSSC grew to $34,950 (+3,395%)
-$1,000 invested using buy-and-hold grew to $16,182 (+1,518%)
So bottom line, investing by the seasonal calendar outperformed buy and hold by better than 2-to-1 over the past 33 years.
An investor could effectively replicate this strategy by buying and selling shares of ticker DIA (the ETF that tracks the Dow Jones Industrials Average) on the indicated buy and sell dates.
This kind of performance might pique some investor’s interest, and some might even think, “Better than 2-to-1, hey I’m on board”. But like anything that relates to investing, one must always take a closer look and make sure they have an acceptable comfort level with whatever method they are going to use before they commit actual hard-erned money.
Taking a Look “Under the Hood”
The first and most important thing to note about this seasonal system is that it must be viewed as “long-term” in nature. In other words, from day-to-day and year-to-year it may vastly outperform, vastly underperform, or pretty be in line with the buy and hold result.
Consider these numbers regarding yearly returns (includes 2012 as if it were a completed year):
JSSC System: UP 38 times (88%), DOWN 5 times (12%)
Buy-and-Hold: UP 31 times (72%), DOWN 12 times (28%)
# of Years JSSC System outperformed Buy-and Hold: 21 (49%)
# of Years JSSC System underperformed Buy-and Hold: 22(51%)
So once again, there is Good News and Bad News. The Good News is that the system experienced only 5 down years versus 12 down years for the buy and hold investor.
Still, the system underperformed buy and hold just over 50% of the time (21 versus 22). So if you are looking for something that is going to “beat the market” year in and year out, you will end up being frustrated. Now let’s expand our horizon a bit to a 5-year window.
5-Year Rolling Returns
For this test we look back at the end of each year at the overall performance for the JSSC System versus buy and hold over the previous 5-year period. Here is where the System’s results start to shine.
JSSC System: UP 39 times (100%), DOWN 0 times (0%)
Buy-and-Hold: UP 29 times (74%), DOWN 10 times (26%)
# of 5-Year Periods where System outperformed Buy-and Hold: 24 (62%)
# of 5-Year Periods where Years System underperformed Buy-and Hold: 15 (38%)
So every 5-year period starting at the end of 1974, has showed gain for the JSSC System.
These results highlight two key components required for long-term investment success.
Two Keys to Long-Term Success: Consistency and Discipline
One of the absolute keys to long-term investment success is the discipline to follow your method over time. In a great many cases, this is easier said than done. Going hand in hand with this is the fact that the more consistently any method generates positive results the more likely an investor is to continue to follow that method without feeling compelled to “deviate” or “tinker” with it.
While year-to-year results can vary widely using the JSSC System I’ve described, the fact that 5-year rolling returns have always been positive is a pretty, well, positive sign and the kind of thing that can give an investor to “stick with it” through “thick and thin.”
So should everyone cease using whatever method or methods they presently use and simply invest a few times a year based on the calendar? That doesn’t seem terribly likely now does it (not to mention that the exchanges would likely go out of business since all trading would take place on just 6 days a year).
Still, on an individual basis it might make sense to consider something along these lines as an objective way to invest a certain portion of one's investment capital.
Staff Writer and Trading Strategist
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