Simple Market Timing Specifics
Stock Market Timing Methods
For those of you who are not ULTRA Clients, it wouldn't be fair to give away much of our research to you. But, since you've made it this far we want to be sure that you leave with some valuable information about stock market timing techniques.
Stock Market Seasonality
The stock market has very important seasonal tendencies that every investor must know. December and January are far and away the best months of the year for the stock market. Actually, as you'll soon see the bullish period runs from late November to early January.
September is easily the worse month of the year. Surprisingly, the next worst month of the year is February as the stock market has seen MANY major tops occur in January. October, which most investors are deathly afraid of, is actually in the middle of the pack as far as performance is concerned.
Don't dismiss these tendencies. They are based on 56 years of stock market history. Why they occur is really unimportant but they do make some sense.
Since the stock market has a historical upward bias, at the end of the year many investors will have gains in their positions. If they can put off selling these profitable positions until the next year they can put off the capital gains tax that they owe for a year. This reduction in selling during December could be the reason for the December/January bullishness.
The September bearishness could be due to the fact that summer is over, everybody's back at work, commuting traffic is at it's peak, winter's coming, etc. Just a lot to be negative about.
The Pre-Thanksgiving Buy Signal.
Here's an example of a market timing strategy that has worked for decades. It's very simple: You BUY on the Monday before thanksgiving and SELL on the third day of January.
The following table details all of the signals and the gains versus the SP500 with a beta of 1.5 modeling the Rydex Nova mutual fund.
|
Sell
Date
|
Gain
|
Date
|
Gain
|
|
01/05/43
|
+8.48%
|
01/06/70
|
-0.68%
|
|
01/05/44
|
+7.94%
|
01/06/71
|
+14.44%
|
|
01/04/45
|
+9.08%
|
01/05/72
|
+20.29%
|
|
01/04/46
|
+0.35%
|
01/04/73
|
+5.02%
|
|
01/04/47
|
+10.38%
|
01/04/74
|
-2.70%
|
|
01/06/48
|
-0.89%
|
01/06/75
|
+4.88%
|
|
01/05/49
|
-0.49%
|
01/06/76
|
+6.40%
|
|
01/05/50
|
+8.03%
|
01/05/77
|
+3.17%
|
|
01/04/51
|
+7.07%
|
01/05/78
|
-3.95%
|
|
01/04/52
|
+7.85%
|
01/04/79
|
+5.24%
|
|
01/06/53
|
+6.25%
|
01/04/80
|
+3.30%
|
|
01/06/54
|
+4.80%
|
01/06/81
|
-0.21%
|
|
01/05/55
|
+8.67%
|
01/06/82
|
-2.99%
|
|
01/05/56
|
-0.90%
|
01/05/83
|
+8.65%
|
|
01/04/57
|
+4.54%
|
01/05/84
|
+2.49%
|
|
01/06/58
|
-1.82%
|
01/04/85
|
+0.53%
|
|
01/06/59
|
+12.45%
|
01/06/86
|
+7.71%
|
|
01/06/60
|
+8.02%
|
01/06/87
|
+3.23%
|
|
01/05/61
|
+7.08%
|
01/06/88
|
+9.82%
|
|
01/04/62
|
-2.26%
|
01/05/89
|
+7.77%
|
|
01/04/63
|
+10.81%
|
01/04/90
|
+7.21%
|
|
01/06/64
|
+6.82%
|
01/04/91
|
+0.78%
|
|
01/06/65
|
-1.94%
|
01/06/92
|
+17.03%
|
|
01/05/66
|
+1.98%
|
01/06/93
|
+3.32%
|
|
01/05/67
|
+2.83%
|
01/05/94
|
+2.75%
|
|
01/04/68
|
+6.07%
|
01/05/95
|
+0.67%
|
|
01/06/69
|
-5.65%
|
01/04/96
|
+5.24%
|
|
-
|
-
|
01/06/97
|
-1.86%
|
Over the period 1943 to 1997 this simple system would have resulted in the following:
- Total trades:55 (75% Winners)
- Maximum Drawdown: -13.9% on 12/11/80 (Far less than the maximum drawdown on the S&P 500 over the same period of -48%.)
- Total Gain: 13,285%
- Compounded Annual Return: 9.2% (The S&P 500 gained 8.7% annually over the same period.)
- Percent Invested: 11.1% (The rest of the time it is invested in a risk-free interest bearing account earning the Commercial Paper Rate which is a good model of a money market account.)
- CAR while invested: 47.5% (While invested, your account appreciates at an incredible 47.5% annual rate.)
The following table details all signals and gains versus the NASDAQ 100 with a beta of 1.0 modeling the Rydex OTC Fund.
|
Sell
Date
|
Gain
|
|
01/05/84
|
-0.20%
|
|
01/04/85
|
+2.15%
|
|
01/06/86
|
+5.86%
|
|
01/06/87
|
+3.16%
|
|
01/06/88
|
+17.16%
|
|
01/05/89
|
+8.34%
|
|
01/04/90
|
+0.58%
|
|
01/04/91
|
+5.23%
|
|
01/06/92
|
+19.03%
|
|
01/06/93
|
+6.85%
|
|
01/05/94
|
+7.42%
|
|
01/05/95
|
-2.75%
|
|
01/04/96
|
-1.43%
|
|
01/06/97
|
+3.90%
|
Over the period 1984 to 1997 this simple strategy would have resulted in the following:
- Total trades: 14 (79% Winners)
- Maximum Drawdown: -11.6% on 12/4/87 (Far less than the maximum drawdown on the NASDAQ 100 over the same period of -40%)
- Compounded Annual Return: 11.2% (The NASDAQ 100 gained 16.8% annually over the same period.)
- Percent Invested: 10.7%
- CAR while invested: 57.6% (While invested, your account appreciates at an incredible 57.6% annual rate.)
The
Pre-Thanksgiving Buy Signal
Real-time performance (10/31/1998-10/31/2003) update.
The above discussion was written in mid-1997 and never updated.. Over the period 10/31/98 to 10/31/03 this signal has done very well. Over that period the SP500 is up +14.9% and suffered a nasty -49.2% maximum drawdown.
If one had followed the PTG buy signal as described above for the SP500 they would have gained +39.2% and only suffered a -12.4% maximum drawdown.
(For ULTRA Clients, the PTG buy signal is part of the SEAS2 system)