I’ve written many times about the ineffectiveness of the Stock Trader’s Almanac‘s “Best Six Months” strategy. From the Almanac:
Our Best Six Months Switching Strategy consistently delivers. Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.
It then improved the basic strategy by adding a timing indicator, Gerald Appel’s Moving Average Convergence Divergence (MACD), to better time the entries and exits. The addition of MACD timing “nearly triples the results.”
Sy Harding’s Riding The Bear called the Best Six Months with MACD timing the “best mechanical system ever.” Apparently, Mr. Harding has never read my Neatest Little Guide to Stock Market Investing. Its Maximum Midcap strategy puts the Best Six Months with timing to shame.
Just on the face of it, do you really think the market is as simple as rising in the winter and falling in the summer? The first time I encountered the seasonal strategy I thought it suspect. The data were there to back it up, but it all stunk of a big coincidence to me.
Recently, the strategy has been a bomb. MACD is open to interpretation, so I can’t say for sure when the Almanac got into and out of the market in the past few years because I don’t pay for a subscription to its newsletter. However, I’ll give it the benefit of the doubt and assume the best possible entries and exits around Nov. 1 and Apr. 30 starting in Autumn 2006.
Buying the Dow at its Oct. 2006 low of 11,608 and selling at its May 2007 high of 13,719 produced a gain of 18%. During that same time, my Maximum Midcap strategy gained 46%.
Staying out of the market until November spared the Best Six Months strategy a 7% loss, and Maximum Midcap posted a 9% loss.
From buying at the November low of 12,707 to last Friday’s close, the Best Six Months strategy has gained 1%. Maximum Midcap has lost 0.7%.
That’s just recently. How about a few years earlier?
Here’s how the Best Six Months with MACD timing did:
2003 +7.8%
2004 +1.8%
2005 +7.7%
Here’s how Maximum Midcap did:
2003 +60%
2004 +29%
2005 +19%
Now that the Federal Reserve has dramatically cut interest rates, the fiscal stimulus package is about to kick in, and earnings are coming in stronger than expected, the Best Six Months strategy is looking for the right time to get out of the market.
Why this strategy continues being highly regarded is a mystery to me.
