Testing Sy Harding’s Seasonal Timing Strategy
A recent article from CXO Advisory Group took an interesting look at Sy Harding’s Seasonal Timing Strategy. The CXO piece set out to evaluate the robustness of the impressive returns that had been previously published about the system.
A previous article had documented that combining an annual entry time around October 16 and an annual exit time around April 20 with a MACD indicator could outperform a buy and hold approach. That article stated that testing this strategy on the Dow Jones Industrial Average from 1999 through 2012 produced a total return of 213%, while buying and holding returned only 93% over that same period.
CXO looked to test the robustness of this strategy by backtesting it on the SPY all the way back to 1993. They used the following rules and assumptions:
- Calculate MACD for SPY using the Exponential Moving Average (EMA) template at StockCharts.com as the difference between the 26-day EMA price and the 12-day EMA price. A bullish (bearish) crossover occurs when MACD moves above (below) its 9-day EMA.
- For each calendar year, sell SPY at the close on April 20 if MACD is bearish or otherwise at the close on the first day with a bearish MACD after April 20. If April 20 is not a trading day, shift to the last trading day before April 20.
- For each calendar year, buy SPY at the close on October 16 if MACD is bullish or otherwise at the close on the first day with a bullish MACD after October 16. If October 16 is not a trading day, shift to the last trading day before October 16.
- To maximize sample size, assume the strategy is in the market at the beginning of the sample period (1/29/93).
- When out of the market, assume a return on cash equal to the contemporaneous T-bill yield.
- For comparison, construct a separate scenario based on seasonal entry/exit only, unmodified by a MACD signal.
- Use SPY buy-and-hold as a benchmark.
- Ignore tax implications of trading semiannually.
Testing a buy and hold strategy against a seasonal strategy with and without the MACD indicator, the found the following results:
Terminal values are $561,156, $479,770 and $508,057 for SPY, Seasonal-MACD and Seasonal Only, respectively. The cumulative return for buying and holding SPY is the highest most of the time, but also the most volatile. MACD adjustments are somewhat disadvantageous compared to a seasonal only strategy. Notable points are:
- The Seasonal Timing Strategy tends to underperform (outperform) buy-and-hold during bull (bear) markets.
- Whether or not the Seasonal Timing Strategy beats buy-and-hold based on terminal values is sensitive to the start and stop dates for the return calculations. The Seasonal Timing Strategy would win a competition during the bad decade of the 2000s.
Further analysis of their results showed that the Seasonal Timing Strategies main strengths were that they outperformed the buy and hold strategy significantly in the very bad years. However, the strategies underperformed buy and hold during the best years.
CXO Advisory Group’s testing reveals some major flaws in Sy Harding’s Seasonal Timing Strategy, however they also point out that there are some other components that should be considered:
Sample size is small in terms of number of bull and bear markets, and test results therefore vary considerably for different start and stop dates.
As noted, tests ignore potential impacts of seasonal trading on capital gains taxes.