Simple Tests of Sy Harding’s Seasonal Timing Strategy

Several readers have inquired about the performance of Sy Harding’s Street Smart Report Online, which includes the Seasonal Timing Strategy. This strategy combines “the market’s best average calendar entry [October 16] and exit [April 20] days with a technical indicator, the Moving Average Convergence Divergence (MACD).” According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 190.6% during 1999 through 2011, compared to 64.4% for the DJIA itself. As a robustness test, we apply this strategy to the SPDR S&P 500 (SPY) exchange-traded fund since its inception. Using daily dividend-adjusted closing prices for SPY and the daily 13-week Treasury bill (T-bill) yield from 1/29/93 (the earliest available for SPY) through 5/7/12, we find that:

Calculations/assumptions used to test the Seasonal Timing Strategy are:

• Calculate MACD for SPY using the Exponential Moving Average (EMA) template at StockCharts.com as the difference between the 26-day EMA price and the 12-day EMA price. A bullish (bearish) crossover occurs when MACD moves above (below) its 9-day EMA.
• For each calendar year, sell SPY at the close on April 20 if MACD is bearish or otherwise at the close on the first day with a bearish MACD after April 20. If April 20 is not a trading day, shift to the last trading day before April 20.
• For each calendar year, buy SPY at the close on October 16 if MACD is bullish or otherwise at the close on the first day with a bullish MACD after October 16. If October 16 is not a trading day, shift to the last trading day before October 16.
• To maximize sample size, assume the strategy is in the market at the beginning of the sample period (1/29/93).
• When out of the market, assume a return on cash equal to the contemporaneous T-bill yield.
• For comparison, construct a separate scenario based on seasonal entry/exit only, unmodified by a MACD signal.
• Use SPY buy-and-hold as a benchmark.
• Ignore tax implications of trading semiannually.

The following table compares average daily gross returns and standard deviations of daily returns over the entire sample period for:

1. Buying and holding SPY (SPY)
2. The Seasonal Timing Strategy with MACD timing adjustments (Seasonal-MACD)
3. The Seasonal Timing Strategy without MACD timing adjustments (Seasonal Only)

Daily returns for buying and holding SPY are the highest, but also the most volatile. MACD adjustments are slightly harmful compared to a simple seasonal only strategy.

How do the daily returns translate into cumulative results?

The following chart compares the gross (frictionless) cumulative returns over the entire sample period for the same three strategies. Terminal values are $439,987, $432,011 and $466,528 for SPY, Seasonal-MACD and Seasonal Only, respectively. The cumulative return for buying and holding SPY is the highest most of the time, but also the most volatile. MACD adjustments are somewhat disadvantageous compared to a seasonal only strategy. Notable points are:

• The Seasonal Timing Strategy tends to underperform (outperform) buy-and-hold during bull (bear) markets.
• Whether or not the Seasonal Timing Strategy beats buy-and-hold based on terminal values is sensitive to the start and stop dates for the return calculations. The Seasonal Timing Strategy would win a competition during the bad decade of the 2000s.

How do the three strategies compare on an annual return basis?

The next chart shows gross annual returns over the entire sample period for buying and holding SPY, Seasonal-MACD and Seasonal Only. Years 1993 and 2012 are partial only. Average gross annual returns (including 1993 and 201) are 9.5% for buying and holding SPY, 8.1% for Seasonal-MACD and 8.6% for Seasonal Only. The respective standard deviations of annual returns are 19.0%, 10.5% and 11.6%. Seasonal-MACD (Seasonal Only) beats buy-and-hold in 8 (10) of 20 years, again indicating that the MACD refinement does not add value.

For clarity, we calculate Seasonal-MACD returns relative to buy-and-hold by year.

The next chart shows the difference in gross annual returns between Seasonal-MACD and buy-and-hold. As noted, 8 of 20 years have positive abnormal returns. No trend is evident. Using 1999 as a starting point, as done at Street Smart Report Online, is advantageous to the Seasonal Timing Strategy.

Are trading frictions material?

The final chart summarizes the effect of trading frictions, ranging from 0.05% to 0.50% per one-way trade, on the terminal values of $100,000 investments per the first chart above. Break-even relative to buy-and-hold occurs at trading frictions of about 0.00% (0.15%) for the Seasonal-MACD (Seasonal Only). Results suggest that the Seasonal Only strategy may be modestly advantageous (disadvantageous) on a net basis for investors with large (small) accounts.

In summary, evidence from simple tests on available data for SPY does not support belief that Sy Harding’s Seasonal Timing Strategy is a compelling improvement over a buy-and-hold strategy or that the MACD signal refinement improves seasonal entry and exit.

Cautions regarding findings include:

• Sample size is small in terms of number of bull and bear markets, and test results therefore vary considerably for different start and stop dates
• As noted, trading frictions vary with investor account size and specific broker fees.
• As noted, tests ignore potential impacts of seasonal trading on capital gains taxes.

Independently, Peter Brimelow and Mark Hulbert report in MarketWatch columns of…

…4/2/12 that “since mid-2002, a buy-and-hold has produced a 5.4% annualized return. A purely mechanical application of the Halloween Indicator (automatically entering the market on Halloween and exiting on May Day) would have produced a 7.0% annualized return. Harding’s modification of the Halloween Indicator produced a 9.0% return (annualized) over the same period, or 2.0 percentage points per year more than a purely mechanical application of this seasonal pattern, and 3.6 percentage points ahead of a buy-and-hold. This is good enough to place Harding’s version of the Halloween Indicator in 4th place for performance since mid 2002, out of the 122 timing strategies the Hulbert Financial Digest has tracked over this period.”

…12/26/11 that Sy Harding’s Street Smart Report (6.5%) is one of the best-performing newsletters for 2011 [8th place] among those tracked by Hulbert Financial Digest. However: “Harding, a market timer who uses fundamental and technical methods…has a long record. The problem: It’s terrible. By HFD count, he’s down 6.03% annualized over the last three years vs. a gain of 15.24% for the dividend-reinvested Wilshire.”

…12/23/10 that Sy Harding’s Street Smart Report (-13.8%) is one of the worst-performing newsletters for 2010 among those tracked by Hulbert Financial Digest.

…12/24/09 that Sy Harding’s Street Smart Report (-12.5%) is one of the worst-performing newsletters for 2009 among those tracked by Hulbert Financial Digest.

…11/5/08 that “Over the year to date through October, Street Smart Report is up 3.6% by Hulbert Financial Digest count, vs. negative 32.9% for the dividend-reinvested Dow Jones Wilshire 5000. Over the past 12 months, the letter is up 5.26% vs. negative 36.31% for the total return DJ-Wilshire 5000. Over the past five years, the letter has achieved an annualized gain of 3.18%, vs. 0.78% annualized for the total return DJ-W 5000.”