Kaeppel’s Sector Seasonality Strategy
This is a test of a sector seasonality strategy Jay Kaeppel of Optionetics describes here and here, and CXO Advisory puts through the paces here.
The strategy rotates between Fidelity sector funds based on yearly seasonality: (a) buy technology (FSPTX) at the Oct. close, (b) switch to energy (FSENX) at the Jan. close, (c) to cash at the May close, (d) to gold (FSAGX) at the Aug. close, (e) to cash at the Sep. close, and (f) back to technology (FSPTX) at the Oct. close.
[logarithmically-scaled, growth of $10,000]
The graph above shows investment results (red) vs the S&P 500 index (blue) from 1987. I’ve assumed a return on cash of half the nearest short-term interest rate composite (^IRX) and ignored what would be minimal transaction costs.
And for the number lovers…
CXO already did a great job looking at the robustness of the strategy. I’m following up with this portfolio-level view just to provide a little bit of perspective for those of us who think in equity curves.
Clearly, based on the nature of the strategy, it’s extremely subject to curve-fitting, but to CXO’s point, it’s performed very well (if not better) in out of sample testing, so I think it deserves a second look.
Next step? I’m going to dig a bit deeper into the individual seasonality plays and try to find comparable funds with a bit more history. I’d also like to test trading the strategy only when the sector is uptrending – I think that would have done a lot to reduce some of the drawdowns the strategy has been prone to.
As always, more to follow.
[click for a summary of all recent posts about Kaeppel's strategy]
Happy Trading,
ms
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Filed under: Stock Market Sectors, Time-based, Trading Strategies | 4 Comments
reviewing the follow plan ( a composite from various sources ) for investing :
buy MDY nov 1 to end of MAY and then into a bond fund , PTTRX for remaining time.
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exception is 3 rd year of presidential year:
invest 1/2 invest in each of SPY & QQQQ starting nov 2010 thru 2011 and revert back to MDY & PTTRX.
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comments and suggestions welcome
RE to Robert G: there are many ways to profit in the markets in many different timeframes. This approach is very focused on long-term seasonality (which is very different than how we trade which is much more focused on the short-term), but I think that’s perfectly fine.
I will say however that I think the observations above (calendar month seasonality & presidential year cycle) are by their nature highly curve-fit (because there have been so few historical observations) and a bit suspect. Expect to underperform the market frequently.
Just my $0.02.
michael