Simple Tests of Sy Harding’s Seasonal Timing Strategy
Posted in Calendar Effects, Technical Trading
April 24, 2010
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).” According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 124% during 1999-2009, compared to 41% for the DJIA itself. As a robustness test, we apply this strategy to the S&P Depository Receipts Trust (SPY) exchange-traded fund since its inception. Using daily dividend-adjusted closing prices for SPY and the daily short-term Interest Rate Composite (T-bill yield) from 1/29/93 (the earliest available for SPY) through 4/23/10, 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.
The following table compares average daily returns and standard deviations of daily returns over the entire sample period for:
- Buying and holding SPY (SPY)
- The Seasonal Timing Strategy with MACD timing adjustments (Seasonal-MACD)
- 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 make only a slight difference for the Seasonal Timing Strategy over the sample period.
How do the daily returns translate into cumulative results?
The following chart compares the cumulative returns over the entire sample period for the same three strategies. The cumulative return for buying and holding SPY is the highest most of the time, but also the most volatile. MACD adjustments are slightly advantageous for the Seasonal Timing Strategy. Notable points are:
- The Seasonal Timing Strategy apparently 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. It appears that 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 annual returns over the entire sample period for buying and holding SPY, Seasonal-MACD and Seasonal Only. Years 1993 and 2010 are partial only. Average annual returns (including 1993 but not 2010) are 9.5% for buying and holding SPY, 8.0% for Seasonal-MACD and 7.9% for Seasonal Only. The respective standard deviations of annual returns are 20.5%, 11.3% and 12.4%. Seasonal-MACD beats buy-and-hold in only six of 17 years (not including 2010). 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 years have positive abnormal returns. Using 1999 as a starting point, as done at Street Smart Report Online, is advantageous to the Seasonal Timing Strategy.
In summary, evidence from simple tests on available data for SPY indicates that Sy Harding’s Seasonal Timing Strategy is not a compelling improvement over a buy-and-hold strategy.
Independently, Peter Brimelow reports in his MarketWatch column of…
…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.”
…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.
