One of the respectable stock market timing strategies issued a sell signal on U.S. stocks (SPY) on May 8, 2012. This strategy is based on Sy Harding's StreetSmartReport.com Seasonal Timing Strategy (STS). It is often called "Sell In May and Go Away."
A similar strategy emphasizes on the buy signal that is often called "The Halloween Indicator." In a study by Jacobsen, Ben and Bouman, Sven, they found statistically significant evidence of the Halloween Indicator's existence in 36 of 37 country stock markets.
The rule of thumb of this seasonality strategy is that the stock market's favorable seasonality begins October 1st or November 1st and ends May 1. But the STS strategy fine tunes this as follows:
- Exit (Sell): after April 20 arrives, the stock market exit rule is that we do not exit the stock market until MACD of a major stock market index such as S&P 500 SPY triggers its next sell signal. For MACD, see MACD Strategy explanation.
- Entry (Buy): after October 16 arrives, the entry rule is that we do not enter the stock market until MACD triggers its next buy signal.
This strategy now issued a sell signal as U.S. stocks has experienced a meaningful correction recently.
The following shows the historical performance of a portfolio STS Seasonal Timing Using DWC that uses Dow Jones U.S. Total Stock Market Index (DWC, used to be called Wilshire Total Stock Market Index). Investors can easily use S&P 500 Index or Dow Jones Industrial Index to replicate this.
Performance (As of 05/09/2012)
Annualized Return
| Name | YTD** Return | 1Yr AR* | 3Yr AR* | 5Yr AR* |
| STS Seasonal Timing Using DWC | 8% | 7% | 9% | 4% |
| VFINX (Vanguard (S&P 500) Index) | 8% | 2% | 16% | 0% |
| VBINX (Vanguard Balance (60% stocks/40% bonds) | 6% | 4% | 13% | 3% |
* AR: Annualized Return
** YTD: Year to Date (not annualized)
(Click to enlarge)
In fact, from 07/01/1971 To 05/09/2012, it has delivered annualized return 8.19% with standard deviation 11.2%, a very respectable performance. For more detailed year by year performance and the portfolio's statistics, see STS Seasonal Timing Using DWC.
The takeaway is that the "Sell In May" strategy has worked out well recently. Considering stocks' recent run-up (SPY's Year To Date (5/10/2012) performance 8.8%), concerned investors can take some profit off the table. On the other hand, regardless how well a strategy has been working recently, the best portfolio strategy is still to stick to a well planned asset allocation strategy that has acceptable risk defined.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
