Portfolio Application for Market Seasonality - InvestingChannel

Portfolio Application for Market Seasonality

The idea of market seasonality is a market phenomenon that has historical evidence to support the theory the November through April time period in the market tends to be a better period than the May through October period.  With that said, now is the time to think about positioning your portfolios accordingly.  “Tilting” seasonally, using a combination of low-volatility and Technical Leaders (Momentum) ETFs, is a powerful way to do that.  We wanted to spend some time discussing a concept that we introduced last year, and that is the combination of the PDP and SPLV, rebalanced biannually based on market seasonality; however, before we get into the specifics, consider the follow quote about Market Seasonality.
The premise of their “Market Seasonality” study is essentially that, historically speaking, the market performs far better during the November through April time period than it does from May through October. On its own, that isn’t a particularly profound statement or a particularly bold assertion, but when we examine the magnitude with which this effect has been chronicled over the years it becomes a very significant underpinning indeed. Consider this, if you were to invest $10,000 in the Dow Jones on May 1st and sell it on October 31st each year since 1950, you have lost money over the last 64 years! Put another way, the entire growth of the Dow Industrials since 1950 has effectively come in the “good” six months of the year.
While the numbers of the “Six Month Switching Strategy” are eye-popping, and the allure of coming to work twice a year to buy the market the first of November and then sell the market the first of May might conjure up dreams of sitting on a tropical island for the other 363 days, the practical application of such a strategy leaves a bit to be desired.  Therefore, today we wanted to present you with a practical portfolio application that you could utilize as a part of your overall equity exposure through the seasonally strong six month period as well as the seasonally weak.

The backdrop for our strategy all lies in the historical bias that having exposure to the market during the seasonally strong six months is a good thing, and having exposure to the market during the seasonally weak period has caused more headache than actual return. Also, the idea of being completely out of the market for an entire six months every single year is not likely to get you excited, let alone being prudent from a compliance standpoint. With that said, we want to generally have an overweighted position to the strongest areas of the market during the seasonally strong period, and an overweighted exposure to the more defensive, lower volatility names during the seasonally weak period. Therefore, in our study we tested a portfolio that owned both the PowerShares DWA Technical Leaders Index [ PDP ] along with the PowerShares S&P Low Volatility ETF [ SPLV ]. During the seasonally strong six months (Nov 1- Apr 30) our portfolio would be 70% PDP and 30% SPLV and during the seasonally weak six months our portfolio would be 30% PDP and 70% SPLV.

As you can see in the table below, the SPLV has generally provided greater returns during the seasonally weak six months (cumulative of 25.33% since 4/30/1997) than the PDP (-2.70%). However, the SPLV has notably lagged the return of the PDP during the seasonally strong six months, up 113.82% compared to 555.10%, respectively. Therefore, a 30% PDP/70% SPLV split during the seasonally weak six months has seen a cumulative return of 20.22%, while a 70% PDP/30% SPLV split during the seasonally strong six months has seen a return of 403.66%.

 

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