Fosback Seasonality Strategy
This is a test of Norman Fosback’s seasonality strategy as described by Mark Hulbert.
See Hulbert’s piece for the whole story, but two important points to note are (a) this strategy began trading in the mid-1970’s (meaning there’s a huge amount of out-of-sample data), and (b) the strategy was ranked #1 at HFD for 20-year risk-adjusted return at the time of its passing.
The graph above shows the S&P 500 index (grey) versus Fosback’s strategy (red) trading the S&P 500 from 1950 (strategy rules to follow).
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) because a benefit of this strategy is so much time spent in cash, I’ve included a return on cash of half the nearest 13-week UST.
Numbers for the number lovers…
Fosback’s strategy rules:
1. “To exploit positive seasonality around the turns of each month: Buy at the close of the third-to-last trading of each month, and sell at the close of the fifth trading session of the following month.”
2. “To exploit positive 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.”
3. “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.”
Note that the first play is very similar to the Turn of the Month strategy we’ve shared in the past.
The strength of Fosback’s strategy hasn’t been so much in producing gains as drastically reducing volatility and time invested in the market (both of which are inherently good things).
Two things in particular I don’t like about the strategy. First, like most seasonality strategies, it has gone through long periods significantly underperforming the market, especially during bull trends. And second, it suffered its worst failures very recently as the chart below of performance since 2000 shows.
The strategy has outperformed the market over the last decade, but clearly has not been its low-volatility/drawdown self.
Though the strategy hasn’t been as effective as others we’ve tested on the blog, I think the fact that it has traded so successfully for so long out-of-sample earns it a bit more consideration. I’ll likely be adding it as another strategy on the Addendum.
In a follow up post, I’ll break out the two parts of the strategy, holidays and the turn of the month, in separate tests.
[Edit: click for a summary of posts related to Fosback Seasonality]
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Filed under: Time-based, Trading Strategies | 11 Comments