Exploring Fosback Seasonality: Turn of the Month Bullishness

11Mar10

This is a second follow up to our test of Fosback’s (original) seasonality strategy.

Fosback’s strategy focuses on two seasonality plays: (a) pre-holiday and (b) turn of the month (TOM) bullishness. In this post I’ll look at the performance of just TOM seasonality, which calls for being long the last two and first five days of every month (from the previous close).

[logarithmically-scaled, growth of $10,000]

The graph above shows the hypothetical results of an investor trading the S&P 500 index (grey) using just Fosback’s TOM seasonality (red) from 1950. For comparison’s sake, I’ve also included the inverse strategy in light red (long all days except the last two and first five days of every month).

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.

Thoughts

With the exception of the go-go 1990’s, TOM seasonality has done a pretty job at capturing the market’s most bullish periods, and is the biggest source of returns in Fosback’s whole strategy.

We’ve covered TOM seasonality before (read more) and it’s included on the State of the Market report. In our variation we define the turn of the month as the first three and final four days of the month – the same length of time (7 days), just shifted forward a bit.

The graph below compares Fosback’s TOM period (red) versus ours (blue) from 1950 (frictionless).

[logarithmically-scaled, growth of $10,000]

This isn’t meant to show off – our results were prepared with the benefit of hindsight that Fosback didn’t have because his strategy was released in the 1970’s. It is to say however that this slightly different interpretation of TOM seasonality has been the superior play since the mid-1980’s.

Per-trade statistics for the number lovers…

Last Note

In running the numbers for this post I found a couple of new nuggets re: TOM seasonality. Most notably that the very last day of the month, while extremely bullish for most of the market’s history, has performed very poorly over the last twenty or so years.

I’ll be covering these new observations in an upcoming post.

[Edit: click for a summary of posts related to Fosback Seasonality] 

Happy Trading,
ms

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Filed under: Time-based, Trading Strategies   |  4 Comments