Six Month Switching Strategy

Posted on 11/05/2012

As we hit November and the beginning of the historically "seasonally strong" period for Equities, now is the time to think about positioning your portfolios for success.  "Tilting" seasonally, using a combination of low-volatility and Technical Leaders ETFs, is a powerful way to do that.  With that said, we wanted to spend some time discussing the concept of combining PDP and SPLV, rebalanced biannually based on market seasonality.  

In the past, we have also done a study focusing on the "sell in May and go away" concept.  As we wrote in that report: 

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 62 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 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 this 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.  With that said, we want to generally have an overweighted position to the strongest areas of the market during the 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 23.83% since 4/30/1997) than the PDP (-10.97%).  However, the SPLV has notably lagged the return during the seasonally strong six months of the PDP, up 86.78% compared to 465.57%, respectively.  Therefore, a 30% PDP/70% SPLV spit during the seasonally weak six months has seen a cumulative return of 16.01% while a 70% PDP/30% SPLV split during the seasonally strong six months has seen a return of 336.34%.

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