Seasons In The Sun
The stock market has them and - guess what? - they can be timed!
Random-walk theorists tell us the market meanders randomly and therefore cannot be timed. Efficient-market theorists claim that all the information that will affect the market is instantly in stock prices. And even Wall Street warns investors not to try to time the market. So if all these naysayers are correct, the only alternative, other than avoiding the stock market altogether, is to buy and hold. But, for the buy-and-hold theory to work, two things must happen.
First, the investor's specific holdings - not the major indexes - must do well over the long haul, bouncing back from any bear markets. However, many stocks popular in one bull market turn out to be pariahs in the next.
Second, for the buy-and-hold theory to work, investors also must emerge from the other side of bear markets still holding the stocks they entered them with. There's no evidence of that ever happening on a wide scale in the past, and it's not likely to occur today.
It's worth noting that the issues in the very indexes used to gauge the market's performance are constantly changing. For example, 30% of the stocks that were in the Dow Jones Industrials when they topped out in 1987 are no longer in that average. They were replaced, a few at a time, by stocks of newer, stronger companies more attuned to the changing economy. And about 60% of the companies that were in the S&P 500 around 25 years ago are gone, because they were bought by, or merged into others, or because they failed or their stocks fell dismally out of favor.
If even blue chips in the indexes can't always be depended upon to recover, is the idea that "the market always comes back" really meaningful to individual investors?
A buy-and-hold strategy guarantees that a person will suffer not only the next bear market, but every bear market in his investing lifetime... Not much fun, considering that over the past 100 years, there have been 22 bear markets, each lasting, on average, 15 months and bringing declines of 36.3%.
But there IS another way to play the game: Timing the market through a simple strategy that has produced sparkling results. And two simple factors underpin this concept:
First, the market tends to make most of its gains between November and May each year, and then usually enters the doldrums between May and November. Why? Because investors receive extra cash between November and May - from sources such as year-end bonuses and distributions, corporate contributions to profit-sharing plans, and income-tax refunds. Much of this flows into stocks, driving prices higher. When the extra dollars stop pouring in, Wall Street slows down until the following October, when the cycle begins again.
Secondly, there appears to be a period of time each month when the markets are especially active, from the last trading day of each month through the fourth trading day of the following month. And this also seems to be linked to cash-flow bulges, as many high-income folks receive their paychecks monthly, rather than weekly.
Therefore when we combine these two patterns, they seem to be telling us: "Enter the market on the next-to-last trading day of every October, and exit to cash on the fourth trading day each May."
Since 1964, had an investor followed this simple mechanical procedure, his performance almost would have doubled the Dow's. Furthermore, the seasonal investor would have done this with half the risk, since he would be exposed to the market only six months each year.
But this is only part of the story.
Obviously, rallies aren't going to begin on the next-to-the-last trading day of every October, and they won't all end on the fourth trading day of every May. So to better pinpoint profitable entry and exit points as the respective calendar dates approach, one must add a simple short-term indicator called MACD.
MACD, better known as Moving Average Convergence/Divergence, signals when market momentum has reversed direction. It is calculated by subtracting a 26-day exponential moving average of the Dow's daily closes from a 12-day exponential moving average. The result is then plotted against a 9-day moving average of the two closes.
A buy signal is triggered when the main MACD indicator line breaks UP through the 9-day moving average. And a sell signal occurs when the indicator line breaks DOWN through the 9-day line.
The addition of that simple technical indicator, frequently found in investment software packages, enhanced the Seasonal Timing Strategy significantly. Its performance tripled that of the Dow!
The way this works: the idea is to simply ignore all MACD signals through the year except when close to a planned calendar entry or exit date. Then, if it triggers a buy signal two or three weeks prior to the calendar entry date, enter immediately rather than waiting. However, if it's still on a short-term sell signal when the calendar entry date arrives, wait until it reverses to a buy signal before entering.
The Seasonal Timing Strategy has worked very, very well in recent years. It easily outpaced buy-and-hold, in part by avoiding the minor corrections of 1997 and 1998. And following this strategy also allows an investor to collect cash for six months every year via interest and dividends. The only downside: It can subject investors to short-term capital-gains taxes.
Will this strategy continue to work? It certainly should. And with the current state of the market, it just might be more important now to be a Seasonal Investor than ever before!
* * * * *
Random-walk theorists tell us the market meanders randomly and therefore cannot be timed. Efficient-market theorists claim that all the information that will affect the market is instantly in stock prices. And even Wall Street warns investors not to try to time the market. So if all these naysayers are correct, the only alternative, other than avoiding the stock market altogether, is to buy and hold. But, for the buy-and-hold theory to work, two things must happen.
First, the investor's specific holdings - not the major indexes - must do well over the long haul, bouncing back from any bear markets. However, many stocks popular in one bull market turn out to be pariahs in the next.
Second, for the buy-and-hold theory to work, investors also must emerge from the other side of bear markets still holding the stocks they entered them with. There's no evidence of that ever happening on a wide scale in the past, and it's not likely to occur today.
It's worth noting that the issues in the very indexes used to gauge the market's performance are constantly changing. For example, 30% of the stocks that were in the Dow Jones Industrials when they topped out in 1987 are no longer in that average. They were replaced, a few at a time, by stocks of newer, stronger companies more attuned to the changing economy. And about 60% of the companies that were in the S&P 500 around 25 years ago are gone, because they were bought by, or merged into others, or because they failed or their stocks fell dismally out of favor.
If even blue chips in the indexes can't always be depended upon to recover, is the idea that "the market always comes back" really meaningful to individual investors?
A buy-and-hold strategy guarantees that a person will suffer not only the next bear market, but every bear market in his investing lifetime... Not much fun, considering that over the past 100 years, there have been 22 bear markets, each lasting, on average, 15 months and bringing declines of 36.3%.
But there IS another way to play the game: Timing the market through a simple strategy that has produced sparkling results. And two simple factors underpin this concept:
First, the market tends to make most of its gains between November and May each year, and then usually enters the doldrums between May and November. Why? Because investors receive extra cash between November and May - from sources such as year-end bonuses and distributions, corporate contributions to profit-sharing plans, and income-tax refunds. Much of this flows into stocks, driving prices higher. When the extra dollars stop pouring in, Wall Street slows down until the following October, when the cycle begins again.
Secondly, there appears to be a period of time each month when the markets are especially active, from the last trading day of each month through the fourth trading day of the following month. And this also seems to be linked to cash-flow bulges, as many high-income folks receive their paychecks monthly, rather than weekly.
Therefore when we combine these two patterns, they seem to be telling us: "Enter the market on the next-to-last trading day of every October, and exit to cash on the fourth trading day each May."
Since 1964, had an investor followed this simple mechanical procedure, his performance almost would have doubled the Dow's. Furthermore, the seasonal investor would have done this with half the risk, since he would be exposed to the market only six months each year.
But this is only part of the story.
Obviously, rallies aren't going to begin on the next-to-the-last trading day of every October, and they won't all end on the fourth trading day of every May. So to better pinpoint profitable entry and exit points as the respective calendar dates approach, one must add a simple short-term indicator called MACD.
MACD, better known as Moving Average Convergence/Divergence, signals when market momentum has reversed direction. It is calculated by subtracting a 26-day exponential moving average of the Dow's daily closes from a 12-day exponential moving average. The result is then plotted against a 9-day moving average of the two closes.
A buy signal is triggered when the main MACD indicator line breaks UP through the 9-day moving average. And a sell signal occurs when the indicator line breaks DOWN through the 9-day line.
The addition of that simple technical indicator, frequently found in investment software packages, enhanced the Seasonal Timing Strategy significantly. Its performance tripled that of the Dow!
The way this works: the idea is to simply ignore all MACD signals through the year except when close to a planned calendar entry or exit date. Then, if it triggers a buy signal two or three weeks prior to the calendar entry date, enter immediately rather than waiting. However, if it's still on a short-term sell signal when the calendar entry date arrives, wait until it reverses to a buy signal before entering.
The Seasonal Timing Strategy has worked very, very well in recent years. It easily outpaced buy-and-hold, in part by avoiding the minor corrections of 1997 and 1998. And following this strategy also allows an investor to collect cash for six months every year via interest and dividends. The only downside: It can subject investors to short-term capital-gains taxes.
Will this strategy continue to work? It certainly should. And with the current state of the market, it just might be more important now to be a Seasonal Investor than ever before!
* * * * *
posted by Bob Moser at
2:36 PM
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