A Unique Seasonal Study to Forecast 2015 Returns

I’m a big fan of seasonality and it’s something we incorporate within the portfolios managed at my firm. While I read many books on trading and technical analysis, there is one that I always have on my desk and that’s the Stock Trader’s Almanac. While the book by Hirsch is an excellent resource for studying seasonality, there’s one study I came across that takes a unique view at using a period of trading to forecast returns for the following year.

Steve Deppe tweeted out on Tuesday about the Turn of Year timing model that begins on November 19th. After reading an article by its creator, Wayne Whaley at Futures Magazine, I found his research pretty interesting. Whaley was the 2010 Charles Dow Award winner by the Market Technical Association for his paper, Planes, Trains, and Automobiles.

While many traders have focused on the first five trading days of the year as a good predictor of whether that year for the equity market will be positive or negative, Wane Whaley looks at the time period between November 19th and January 19th. While studying different time periods, this specific two months predicted the market’s direction since 1949 with an 80.65% accuracy, according to Whaley’s paper written for NAAIM.

Whaley found the resulting performance of the S&P 500 during this time period and breaks it up into three categories: greater than 3%, 0% to 3%, and less than 0%. The table below shows the results of the two month period and the following twelve months performance for the equity index.

Whaley found that by looking at the two month period starting on November 19th, the timing model did a good job at forecasting negative and positive years for the stock market:

There was only one losing year (1987) out of 30 after a 3% plus bullish Turn of Year setup. In defense of that case, the S&P actually was up 20% from Jan. 19 through mid-August before succumbing to the double digit interest rates that fall that led to Black Monday (Oct 19). Conversely, there have been eight occasions since 1950 when the post-Jan. 19 year finished with a double-digit loss, and six of those eight occurred after one of the negative Turn of Year periods. All three of the -20% post-Jan. 19 years followed a negative Turn of Year period.

 

Wayne goes on in the article to show how he incorporates this new method of forecasting along with the notion of ‘sell in may.’ His findings are pretty interesting and the whole article is well worth a read for those interested in seasonality.

Source: Trade less, earn more with Turn of Year timing model (Futures Magazine)
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