Do you know the phrase: “Sell in May and go away… but remember to come back in September.“
What do you think would you have earned, if you have followed this simple rule over the last years on the S&P500?
Let’s assume that you followed this simple rule since 07/01/1998 for 20 years until the 07/01/2017. You invest 10,000 US$ and then you would have earned 11,394 Dollars. Not too bad for such a simple strategy. But know let’s compare it with the simple buy and hold strategy. In this case you would have earned 11,336 Dollars. This is nearly the same amount. Why should anybody make the effort to search for another option than buy and hold.
The answer is simple: Drawdown.
Performance Buy and Hold
If you followed the buy and hold strategy you would have lost roughly 50% to 60% of your capital for two times. First after the burst of the internet bubble and then at the financial crisis 2008.
Are you able to tolerate these drawdowns?
Imagine that you lose half of your money or capital and you don’t know whether you will get it back. The recovery can last more years than you can afford. Therefore everybody tries to minimize the drawdown. And it depends on your entry date whether you can build up some gains, before the drawdown hits you or whether the drawdown hits you directly after you start the buy and hold strategy.
Performance “Sell in May” Strategy.
As you can see with the simple seasonal Trading strategy you have less drawdown (5,400$) compared to roughly 8,000$ and you don’t lose your initial capital. This is a huge advantage. But I have to admit, that this result depends on your starting point. If you start with a looser, then of course you will lose some capital.
Comparsion “Buy and Hold” versus “Sell in May”
If you compare the annual results of these two strategies you will see, that the buy and hold strategy has 5 loosing years (2000 (1380), 2001 (1486), 2002 (2294), 2008 (4925), 2015 (147)) while the “Sell in May” strategy has only 4 loosing years (2000 (1441), 2002 (929), 2005 (36), 2008 (2712)) and the amounts are less painful.
Overall this seems to be a very simple and reliable strategy and significantly improves the buy and hold strategy.
Let’s take a look whether we can improve the results with some simple tricks.
Improvements “Sell in May” Strategy
First of all we insert a simple trend filter because we don’t want to enter a long trade when a bubble burst. For this purpose we you a simple moving average with a length of 200 bars, i.e. roughly one year. This filter tells us, whether we have an uptrend or and downtrend. We don’t want to enter a long position in a downtrend.
Second we want to profit from the downturns as well and sell short. The phrase “Sell in May” tells us, that it might go down the next months. This gives us a hint for possible downturns which might occur after May. Another observation is the behavior of the market over the last decades. It seems to be a good idea to short the market in December if we have a downtrend and to exit it at the end of January.
So we can go long in September or February and exit these positions in May or December.
We can short the market in December or June and exit these positions in September or December.
When we apply these additional rules to the “Sell in May” rule we get some nice results.
The Profit increased to 12,438$ which are roughly 1,000$ more.
But which is far more important is the drawdown. This value is cut in half and counts 2,473$ whereas before it were 5390$. This are 45% from the initial value and only 31% from the buy and hold strategy.
Another nice advantage are the annual results. You have only 2 years with a negative outcome, 2000 with 894$ loss and 2012 with 274$ loss. This is a big advantage. We cut the looser and improved the overall Profit.
To get a really good strategy you have to do some more improvements. For example to look for support and resistance points or to draw some trendlines. If you do this work, you can achieve some significant improvements on this good basis concept. For example after looking at this additional technical aspects it is possible to push the net profit by 50% and lower the drawdown.
If you want some more information about this tradeble strategy contact me.