I’m a big fan of Dr. Jerry Minton’s research on seasonal trends. He has created a strategy which invests in the S&P 400 Mid Cap index from November to the end of May (sounds like the old Wall Street adage “sell in May and go away”). When not invested in the stock market, the strategy calls for investors to move money into intermediate treasury bonds from June to the end of October.
According to Dr Minton, this strategy has produced gains over the past 25 years that are 80% higher than the S&P 500 index: 18.0% vs 10.2% – while exposing the portfolio to 40% less risk than the S&P 500.
I was curious to see what would happen if we change some of the variables, such as using different indicies, using leverage, or using inverse funds to short the market.
To start I wanted to backtest the strategy to see what would happen when we buy the S&P 400 Midcap Index in November and sold it in May. For this I used the closing price on October 31st and the closing price on May 31st – since most investors would probably use this strategy with a mutual fund that tracked the index. Investors are given the end of the day price when investing in mutual funds, so by buying on October 31st, they would be invested at the open of trading on Nov 1st.
The backtesting used a start date of October 31st 1991 (the S&P 400 index was created in 1991) and ended year-end 2010. I inputed the strategy of only buying the S&P 400 Mid Cap Index from Oct 31st to the end of May while remaining in cash the other months, which produced an impressive 10.24% return.
Initial capital 10000.00
Ending capital 66175.53
Net Profit 56175.53 5
Exposure % 57.32
Annual Return % 10.24
Risk Adjusted Return % 17.87
Ulcer Index 5.38
(note: the N/A in the chart above is shown because no assets where invested during that time)
This is a seasonal strategy that can be easily put into place by any investor. In future blog posts I plan to further test this system using different variables. Also I would like to see what happens if we add various technical indicators to the mix. For example what happens if we use the 200 day moving average as a sell signal during the months of November through May?
In the meantime, if you would like to read more on Dr Milton’s research, his website is: www.alphaim.net.
Photo courtesy of betacam