Market Timing Performances - Methodology -
This page details the methodology used to compute the returns in the Market Timing performances table.
The index used is the S&500 from 1st January of 1950 to 31st December of 2008 with dividends excluded.
The timing of the Buy and Sell signals are adapted to allow computation of performance returns on an annual basis:
e.g. a Buy and Hold investor or someone using the Best 6 Months market timing strategy does not sell on the last trading day of December and then buy back on the 1st trading day of January.
Market Timing Performances without Dividends
Buy and Hold
- Buy: OPEN on 1st trading day of January.
- Sell: CLOSE on last trading day of December.
- Buy: OPEN on 1st trading day after a Buy signal (50-day moving average rises above 200-day moving average).
- Sell: OPEN on 1st trading day after a Sell signal (50-day moving average drops below 200-day moving average).
Presidential cycle
- Year 1 and 2 of presidential cycle: 0%.
- Year 3 and 4 of presidential cycle: same as Buy and Hold.
Combined Monetary and Presidential cycle
- Year 1 of presidential cycle: same as Buy and Hold if fed fund rate 1 year ago (End December value) is lower than the fed fund rate 2 years ago (End December value), 0% otherwise.
- Year 2 of presidential cycle: 0%.
- Year 3 and 4 of presidential cycle: same as Buy and Hold.
Optimized monetary and Presidential cycle
This is an optimized version of the above market timing strategy. It takes advantage of a very favorable period in years 2 of the presidential cycle.
- Year 1, 3 and 4 of presidential cycle: same as "Combined Monetary and Presidential cycle".
- Year 2 of presidential cycle: Buy at OPEN on 1st trading day of October and Sell at CLOSE of last trading day of December.
Best 6 Months - "Sell in May and Go Away" -
This strategy has 2 signals per year.
1st Signal
- Buy: OPEN on 1st trading day of January.
- Sell: OPEN on 1st trading day of May.
2nd Signal
- Buy: OPEN on 1st trading day of November.
- Sell: CLOSE on last trading day of December.
Best 6 Months + MACD
This timing strategy is an improvement of the Best 6 Months and has 2 signals per year too.
1st Signal
- Buy: OPEN on 1st trading day of January.
- Sell: OPEN on 1st trading day after a Sell signal (MACD histogram turns negative) from 20th April.
2nd Signal
- Buy: OPEN on 1st trading day after a Buy signal (MACD histogram turns positive) from 16th October.
- Sell: CLOSE on last trading day of December.
Market Timing Performances with Dividends
Buy and Sell signals are same as above. In addition, for each year, extra gains due to Dividends are as follows:
%time_in_the_Market*Dividends_Yield+(1-%time_in_the_Market)*TBills_Rate
Dividends Yield at the begining of the year is used.
When a strategy is out of the market, it earns interest at the TBills rate which is conservative.
For Buy and Hold, %time_in_Market is 100% every year. For the other strategies, it varies every year.
Example: Best 6 Months + MACD in 2008
S&P500 Dividends Yield=2%, TBills Rate=1.8%.
Best 6 Months + MACD was in the market during 168 Days.
Therfore:
Extra Gain from Dividends = 168/365*2%+(1-168/365)*1.8%=1.9%.
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