Value Investing and Best 6 months Market Timing

In The Right Stock at the Right Time, Larry Williams backtested some mechanical Value strategies in combination with the best 6 months calendar timing system using the Dow Jones Industrial Average as investing universe.

Mechanical portfolios such as buying the 5 lowest Price/Earning, or 5 lowest Price/Sales, or 5 lowest Price/Cash Flow, or 5 highest Dividend Yields among the Dow stocks were constructed on October 15th and held till April 15th. The backtest was done over 27 years from 1975 to 2001.

Results showed that such strategy beats the Dow Jones Index. Buying the 5 lowest Price/Sales Dow stocks during the best 6 months provided a gain of 13.1% (standard deviation 9.6%) while investing in the Dow itself during the best 6 months provided a gain of 9.5% (standard deviation 9.9%).

Notice the low standard deviations: a benefit of Market Timing. Value Investing allows to increase the performances of Market Timing while maintaining the lower volatility inherent to timing.

Michael O'Higgins came up to similar conclusions in Beating the Dow where he backtested similar Value strategies on the Dow Jones and Best 6 months timing system from 1977 to 1998.

Larry Williams also backtested the strategies when holding the portfolios from October 15th till August 31st. The objective was to avoid the worst investing month: September. Taking, the low Price/Sales portfolio as example, the performances improved to 22.8% average annual return while standard deviation degraded to 14.3%. This can be compared with James O'Shaughnessy's Large Cap Low Price/Sales mechanical portfolio which returned 21.6% with 19.4% standard deviation from 1975 to 1996.Avoiding September allows to maintain the high returns of mechanical portfolios and nicely decreases risk.


Investing UniverseStrategyMarket TimingAverage ReturnStandard Deviation
Dow JonesLow Price/SalesBest 6 Months13.1%9.6%
Dow JonesAll StocksBest 6 Months9.5%9.9%
Dow JonesLow Price/SalesAll Months except September22.8%14.3%
Large CapLow Price/SalesAll Months 21.6%19.4%
Dow JonesAll StocksAll Months 13.6%14.7%
(All data from 1975-2001 except "Large Cap, Low Price/Sales, All Months" from 1975 to 1996)

What about Growth/Momentum Investing ? Go back to Top

Can they benefit from the Best 6 Months timing ?

Well, the best 6 months strategy has been enhanced with the use of the MACD by Sy Harding in Riding the Bear: How to prosper in the coming Bear Market.

If you don't know much of Technical Analysis, the MACD  gives a Buy signal when a short moving average rises above a longer moving average and gives a Sell signal when the short moving average drops below the longer moving average.

The revised Best 6 Months strategy is to check for a MACD Buy signal starting from mid-October and check for a MACD Sell signal starting from mid-April. Holding period fluctuates from 5 to 7 months instead of 6 months every year. From 1975 to 2001 the average returns on the Dow Jones was 11.8% (standard deviation 11.5%) versus 9.5% (standard deviation 9.9%) for the original best 6 months.

Better, the Hirsh organization (Stock Traders Almanac) applied a similar strategy to the Nasdaq and came up with a Best 8 Months strategy + MACD timing on the Nasdaq. Check for a MACD Buy signal starting from mid-October and check for a MACD Sell signal starting from mid-June. 

Since MACD is a trend follower, similar to Moving Averages, it is well adapted to Momentum Investing (Momentum is trend following). Here you go: use Momentum Investing with either the Best 6 Months & MACD Timing on the Dow/S&P500 or the Best 8 Months & MACD Timing on the Nasdaq. You can easily track the MACD of any Stock Market Index yourself with any Technical Analysis chart (many are free on the Internet).


See also:
Stock Picking and Presidential Cycle Market Timing

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