Seasonality refers to cyclical “patterns” that may repeat over defined periods of time. These periods/cycles occur regularly and last anywhere from a few days, e.g. 7-day Santa Claus rally that might occur in December/January every year, to longer term, e.g. 4-yr Presidential cycle. Some investors believe that this “seasonality” is tradeable.
Most Investors reading this blog have probably heard the phrase “Sell in May and Go Away” that refers to the belief that markets are stronger in the winter months (November-April) than in the summer months (May-October) – when they are weaker (slower and more risky) due to market participants going on vacation. Now that November is here, let’s take a look at this advice.
In this post I present an analysis of the performance of the S&P 500, as represented by the SPY Exchange Traded Fund (ETF), since its inception in 1993. Returns are split between the two 6-month periods.
First, a look at the annual cumulation of average daily returns over the 27 years:
From the above figure we see that the annual cumulative sum of average daily returns of the S&P 500 (SPY) over the past 27 years is an impressive ~11%. These returns include dividends but are not compounded. Most Buy-And-Hold investors would probably be very satisfied with these returns, especially if returns were compounded.
However, back to seasonality, what do the “seasonal” returns look like?
If we break down the returns by year we see the following:
where we see that the average “summer” return is ~3.5% with a net 97% total return over the 27 years and the average “winter” return is ~7% with a total net 188% return – so the advice to “Sell in May and Go Away” might seem to be good advice if we don’t have to worry about the markets for 6 months of the year since average and net winter returns are approximately twice the value of summer returns.
Percent winning years is ~80% for both winter and summer “seasons” with Profit Factor (Av Win/Av Loss) and Expectancy per unit of risk favoring the winter season. However, ignoring the summer season would have missed out on 4 years of >15% returns and over 13% in this year’s summer season. It would however have avoided 3 years of >15% losses, including a 29% loss in 2008. Winter losses have been less severe with only 1 year returning a loss of more than 10%.
So, is it worth the effort and cost of adopting this “Seasonal” advice as a modified Buy-And-Hold system? The answer to that question probably depends on how you want to spend your summer months and what you want to do with the money during that period.
Although “Seasonality” can be considered as a stand-alone “system” I don’t think it is really robust enough to be reliable purely in it’s own right. However, it is worth keeping in mind as a confirmatory signal in combination with other systems. For example, a Momentum Buy signal in the “winter” months might be more attractive than a Buy signal in the “summer” months – although there is no obvious reason to discard Momentum Buy signals in the “summer” months. However, a Sell Momentum signal in the “summer” months probably shouldn’t be ignored.
In future posts I’ll take a look at other “Seasonal” considerations.