Mark Hulbert, at the WSJ's Market Watch had a pretty interesting article this morning on "The highest-ranked stock market timing system that I monitor". What was so amazing was how simple it is, and yet so effective, particularly for such a relatively low risk system. Better yet, all that's required for this timing system is a calendar.
Trading the calendar Feb. 4, 2010, 12:01 a.m. EST
Bad news, investors: The highest-ranked stock market timing system that I monitor is directing investors to get completely out of stocks at the end of this week's trading.
Don't despair too much, however. The system is also planning on getting completely back into stocks at the close of next Wednesday, February 10.
I'm referring to the Seasonality Trading System, which was created by Norman Fosback in the early 1970s. ...
What is this timing system's secret?
The answer, it turns out, is incredibly simple: Paying attention to what day of the month it is. The system calls for being 100% in stocks at the turns of each calendar month and prior to exchange holidays. It is in cash at all other times.
Believe it or not, that's it.
What makes this timing system's performance so impressive is not that it is 0.6 percentage points ahead of a buy-and-hold strategy on an annualized basis (though even that puts it ahead of most market timing systems I monitor). Instead, it's a huge achievement to be able to even keep pace with the market while being in cash more than half the time.
For example, for the decade ending this past December, the Seasonality Timing System beat a buy-and-hold by 4.5 percentage points per year on an annualized basis. During the decade of the 1990s, in contrast, the system lagged a buy-and-hold by 4.2 percentage points per year, and during the 1980s it beat the market by "just" 1.5 percentage points.
To be sure, both of those earlier decades' results are still impressive, given the timing system's low risk. But, notice that, in terms of relative rather than absolute returns, the system appears to have just completed its best decade of the last three.
Disclosure: no relevant positions