Seasonal Switching Strategy Update: “Worst Months” Incoming By: Christopher Mistal | March 23, 2017 | Email | Print

From our Seasonal MACD Buy Signal on October 24, 2016 through yesterday’s close, DJIA gained 13.4%, S&P 500 climbed 9.2% while NASDAQ was up 9.6%. At their respective high closes on March 1, 2017, DJIA was up nearly 16% and S&P 500 and NASDAQ were up over 11%. Either at yesterday’s close or the highs, this performance is above long-term averages.

 

Naturally this level of gains has some concerned while others may be thinking “yesterday’s” performance will continue “tomorrow.” Our recent look at Solid Best Six Month Performance would agree with those that are concerned as past above average and even well-above average “Best Six Month” performance did not carry forward into the subsequent “Worst Six Months.” The “Worst Six Months” were still tepid with only a fractional average gain.

 

The long-term track record of our Seasonal Switching Strategy, which is based upon the “Best Six Months”, has a solid track record of outperformance with potentially less risk compared to a buy and hold approach. Since 1950, DJIA’s average annual gain has been 8.3%. Over the same time period, DJIA has lost an average 1.1% during the “Worst Six Months,” May through October, and gained an average 9.2% during the “Best Six Months,” November through April.

 

Detractors are quick to point out that there have been positive “bad” months and negative “good” months. This is absolutely true as there is no trading or investment strategy that works 100% of the time (even the best will report a trading loss every once and a while). In post-election years, the worst performing year of the four-year cycle (page 130, STA17), there have been some nasty selloffs. Most recently in 2001 when DJIA fell 17.3%, S&P 500 dropped 15.6% and NASDAQ plunged 31.1% during the worst months. Barring another “once-in-a-generation” bear market and financial crisis, the double-digit gains of 2009 are not highly likely this year. And with the Fed clearly in a tightening cycle, a repeat of 2013’s quantitative easing fueled gains are also unlikely. 

 

 

 

Because of the heightened level of risk of a pullback or correction that has been historically observed during the “Worst Six Months” of the year, May through October, and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we take in Almanac Investor. We do not merely “sell in May and go away.” Instead we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit new long exposure.

 

For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of. Preservation of capital may be more important than growth and with historical averages and frequency of gains reduced; the “Worst Six Months” are a good time to simply step aside if you prefer. August, September and/or October have provided some excellent buying opportunities in recent years and could do the same again this year. 

 

 

 

Currently, the Almanac Investor Stock Portfolio and ETF Portfolio are positioned with a long-only bias for the “Best Months” with no long exposure to bonds, individual stock or sector short, or positions in bear market funds. But, beginning April 3, 2017 we will begin looking for our seasonal MACD sell signal accompanied by signs of seasonal weakness. Our recent Official Seasonal MACD Sell Signal Alerts proved rather timely as the market topped shortly thereafter.

 

When both the DJIA and S&P 500 MACD Sell indicators trigger a sell signal, we will issue an Almanac Investor Alert. We will either outright sell specific positions or implement tight trailing stop losses. Bearish/defensive positions in: iShares 7-10 Year Treasury (IEF), iShares 20+ Year Treasury (TLT), SPDR Gold (GLD), ProShares Short Dow 30 (DOG), ProShares Short S&P 500 (SH) and/or other protective strategies may also be considered. All stock and ETF holdings will be evaluated at that time. ETFs providing exposure to sector seasonalities ending in April and May along with underperforming stocks in the Almanac Investor Stock Portfolio may be sold at that time as well.

 

For traders and investors employing the “Best 6 + 4-Year Cycle” as detailed on page 62 of the Stock Trader’s Almanac 2017, this year’s upcoming Seasonal MACD Sell signal should be heeded as the multi-year hold period is coming to an end.