Tactical Seasonal Switching Strategy Update: Worst Months Still Tepid in Pre-Election Years By: Christopher Mistal | March 21, 2019 | Email | Print

 

From our Seasonal MACD Buy Signal on October 31, 2018 through yesterday’s close, DJIA gained 2.51%, S&P 500 climbed 4.15% while NASDAQ was up 5.79%. Today’s solid gains will boost these numbers further, but they are still below average for the strategy. Our signal did miss part of last year’s fourth quarter swoon, but not all of it.

 

The long-term track record of our Seasonal Switching Strategy, which is based upon the “Best Six Months” in conjunction with our MACD Technical Buy and Sell Signal Triggers, 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 0.8% during the “Worst Six Months,” May through October, and gained an average 9.1% 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 pre-election years, the best performing year of the four-year cycle (page 130, STA19), there have been selloffs. The “Worst Months” in 1987 hosted the largest decline. More recently, during 2011 and 2015, the “Worst Months” were also negative. Each of the last 17 Pre-Election Year “Worst Months” can be seen in the following table. DJIA and S&P 500 Worst Six Months are May through the end of October. NASDAQ’s “Worst Four Months” are June through October.

 

 

Considering the paltry historical average gains, even in pre-election years, during the “Worst Months” a cautious approach is worth consideration. Tariffs and trade are still an ongoing issue. Slowing growth due to the fading effects of tax cuts and tougher year-over-year earnings comparisons are also a concern. Alone each has the potential to sour investor and trader appetites for stocks.

 

 

Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we take in the Almanac Investor Stock and ETF Portfolios. 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 adding new long exposure to positions from sectors that have a demonstrated record of outperforming during the period.

 

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, no short positions in individual stocks or sectors, or positions in bear market funds. But, beginning April 1, 2019 we will begin looking for our seasonal MACD sell signal. When it triggers we will transition to a less aggressive stance in the portfolios.

 

When both the DJIA and S&P 500 MACD Sell indicators trigger a new sell signal after April 1, 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 2019, this year’s upcoming Seasonal MACD Sell signal could be ignored as the multi-year hold period is underway. It may still be prudent to use the signal as a reminder to review all holdings and objectives.