Blog - Investing Notes

June 23, 2008 - A Simple Test of Sy Harding's "Seasonal Timing Strategy"

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] day with a technical indicator, the Moving Average Convergence Divergence (MACD), or MACD." According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 142.6% over the period 1999-2007, compared to 72% for the DJIA itself. We test this strategy here using a different index fund over a longer period. Using daily dividend-adjusted closing prices for the S&P Depository Receipts Trust (SPY) from 1/29/93 (the earliest available) through 6/19/08, we find that...

We make the following calculations/assumptions to test the "Seasonal Timing Strategy":

• We 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, we 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, we shift to the last trading day before April 20.
• For each calendar year, we 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, we shift to the last trading day before October 16.
• To maximize sample size, we assume the strategy is in the market at the beginning of the sample period (1/29/93).
• When the strategy is out of the market, we assume a return on cash equal to the contemporaneous 90-day Treasury bill yield.
• For comparison, we construct a separate scenario based on seasonal entry/exit only, unmodified by the state of MACD.
• As a benchmark, we construct also a SPY buy-and-hold scenario.

The following table compares the daily 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); and, (3) the "Seasonal Timing Strategy" without MACD timing adjustments (Seasonal Only). Daily returns for buying and holding SPY are the highest, but these returns are also the most volatile. MACD adjustments make little difference for the "Seasonal Timing Strategy" over the sample period.

How do the daily returns translate into cumulative results?

The following chart depicts the cumulative returns over the entire sample period for buying and holding SPY, Seasonal-MACD and Seasonal Only. Raw returns for buying and holding SPY are are almost always the highest, but these returns are also the most volatile. MACD adjustments are slightly disadvantageous for the "Seasonal Timing Strategy". In general, it appears the the "Seasonal Timing Strategy" tends to underperform (outperform) buy-and-hold during bull (bear) markets.

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

The next chart shows annual returns over the entire sample period for buying and holding SPY, Seasonal-MACD and Seasonal Only. Years 1993 and 2008 are partial only. Average annual returns (including 1993 and 2008) are 10.3% for buying and holding SPY, 8.0% for Seasonal-MACD and 8.4% for Seasonal Only. The respective standard deviations of annual returns are 17.6%, 11.2% and 11.9%. Seasonal-MACD beats buy-and-hold in only six of 16 years. Performances for the strategy with and without MACD timing adjustments are very similar.

For clarity, we calculate abnormal returns for Seasonal-MACD by year.

The final chart shows the difference in annual returns between Seasonal-MACD and buying and holding SPY. As noted, only six of 16 years have positive abnormal returns. Using 1999 as a starting point, as done at Street Smart Report Online, is very advantageous to the "Seasonal Timing Strategy".

In summary, Sy Harding's "Seasonal Timing Strategy" is unimpressive when tested against available data for SPY.

For tests of a few other trading strategies (as well as reviews of some books and information web sites), see Blog Synthesis: Reviews of Books and Web Sites.