Exploring Fosback Seasonality: Pre-Holiday Bullishness
This is a follow up to yesterday’s test of Fosback’s (original) seasonality strategy.
Fosback’s strategy focuses on two seasonality plays: (a) pre-holiday and (b) turn of the month bullishness. In this post I’ll look at the performance of just pre-holiday seasonality, which calls for being long the two days prior to any market holiday (and possibly a bit longer based on a couple of exceptions described below).
[logarithmically-scaled, growth of $10,000]
The graph above shows the hypothetical results of an investor trading the S&P 500 index using just pre-holiday seasonality, from 1950 (strategy rules to follow). Note that this strategy is only in the market about 8% of the time.
Geek notes: (a) these results do not account for transaction costs, but could be closely reproduced in today’s market using mutual funds (less part of an annual expense ratio), and (b) unlike our previous portfolio-level test, I have NOT accounted for return on cash.
Per-trade statistics for the number lovers…
Rules for Fosback’s pre-holiday seasonality:
“Buy at the close of the third-to-last trading day prior to exchange holidays, and sell at the close of the last trading day before a holiday. Exceptions: If the holiday falls on a Thursday, sell at Friday’s close rather than Wednesday’s. Also, if the last day before a holiday is the first trading day of the week, don’t sell until the day after the holiday. Finally, never sell on the first trading day after options expire; instead wait an extra day.”
Thoughts
The first graph shows that Fosback’s pre-holiday seasonality lost a lot of steam in the mid-70’s (around the time the strategy was originally released) and again in the early-90’s. While the strategy continues to pick days that are more bullish than most, its picks are not nearly as effective as they once were.
I think in today’s market some specific holidays, especially those near the end of the year, still exhibit strong seasonality (CXO Advisory has done a number of excellent related studies), but that’s beyond the scope of the strategy as Fosback described it; here we’re buying ahead of all holidays.
This means that most of the returns of Fosback’s whole strategy have come from turn of the month seasonality, and in our next post I’ll break out just those results.
[Edit: click for a summary of posts related to Fosback Seasonality]
Happy Trading,
ms
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Filed under: Time-based, Trading Strategies | 5 Comments
Hi Mike!
Nice post as always :) I have one question for you, have you ever tried to quantify trading volume in your strategies? Do you use volume information at all?
RE to blink: thank you kindly.
I break from the analysis of some of my peers on the subject of volume. I’ve never found it to have a CONSISTENT impact on anything I’ve looked at. Note that I’m referring to index-level volume not individual stocks (no opinion on those). Also note that I’m very open to being proven wrong, I just haven’t seen any evidence I can get behind. michael
Not to rain on your parade here but this idea and concept is stricly taken from Martin Zweig and his ZUPI strategies. As a small trade to be run on a BB for years it has worked and presumbly will continue to do so in the long run.
RE to TOIG: not sure I follow. The idea (as tested in this post) is taken from Norman Fosback who released the strategy in the 1970′s. Many, many folks have discussed TOM seasonality in the past and I link to a number of them in my post: http://marketsci.wordpress.com/2008/12/19/turn-of-the-month-strategy/
Unless Fosback got the idea from Zweig (which given Zweig’s age is entirely possible), I would humbly disagree. michael
[EDIT: I just noticed that this was a comment re: pre-holiday, not TOM, seasonality...same response. The idea came from Fosback. It's been discussed by many folks before and after, and unless Zweig was the very first to take note of it (pre-1970's), I humbly disagree]