Calendar Market Timing systemsCalendar Market Timing systems are interesting because they don't look at any fundamental or technical information from the stock market. They are purely based on the calendar (except for some optimized models). As you'll discover, they can perform very well.Best 6 months: "Sell in May and Go Away"Many studies have shown that stock markets, worldwide, generally make most of their gains between November and April.The basic strategy is to buy around the 1st of November and to sell around the 31st of April. Note the emphasis on "around". An "Optimized" version that sells on the 4th of May exists. Well, maybe...Data Mining. Several reasons have been given for the outperformance of markets from the 6 months between November to April:
Investing only from November to April allows to capture 80%-90% of the Market Returns but with much lower risk. Risk is reduced, not just because you're in the market half of the time, but also because you're in the market during less volatile periods. Historically, most severe drop in the market happened in September-October (1929, 1974, 1987, 2008). The system has been enhanced with Technical Analysis using the MACD (Moving Average Convergence Divergence): check Momentum Stock Picking and Market Timing. Presidential Cycle Go back to TopMarkets tend to perform much better during the 3rd and 4th year of the US Presidential Election cycle than during the 1st and 2nd. The performance difference is staggering and cannot be ignored.
The main reason given for the outperformance in years 3 and 4 is that the current party would announce positive measures ahead of the election taking place at the end of year 4. For instance, cut in Tax on Dividends was announced in 2003: a year 3 of the presidential cycle. Investing only during the 3rd and 4th year provides a lower rate of return than Buy And Hold but with lower risk. Between 1950 and 2008, average Gain is 6.1% (standard Deviation 11.6%) compared to 8.4% (standard deviation 17.1%) for Buy And Hold. Risk is reduced because volatility is much lower in year 3 and you're in the market only 50% of the time. Returns and volatility in year 4 have been greatly impacted by the 2008 bear market. You can invest in Bonds during the 1st and 2nd year of the cycle: the low rate of returns for stocks during these 2 years suggests that Bonds could provide similar or better performances but, again, with lower risk. See how this system and many others performed in Performances of Market Timing systems). Combined Best 6 Months and Presidential Cycle Go back to TopWhat if we combine the above 2 strategies?
This strategy earns 8.1% (standard deviation 13.4%) versus Buy and Hold returns of 8.4% (standard deviation 17.1%). It actually beats Buy and Hold in Annualized Returns thanks to lower risk. It also beats (matches in year 3 and 4) Buy And Hold 3 out of every 4 years. Finally, it is a very simple system to put in place. Using Asset Allocation, if you want your portfolio's volatility to drop from 17.1% to 13.4%, you'll need about 40% in Bonds. Doing this would drop your expected returns to less than 7%. This market timing system therefore beats Asset Allocation. Although less successful, variation 2 of the combined model has some merit as well. It invests in Stocks from November 1st of the year 2 till April 31st of the year 1 of the next election cycle for a total investing duration of 2 and a half years. The main benefit is that it is more Tax friendly: you won't pay any short term capital gain tax. It earns 7.4% (standard deviation 12%). All returns exclude dividends. See also: Moving Averages Market Timing Best 6 Months and MACD Indicator Timing Monetary Market Timing Finally, check Stock Picking & Market Timing to see how you can improve your investment returns by combining Stock Picking with the above market timing systems. |
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