From the August 01, 2009 issue of Futures Magazine • Subscribe!

Book review: Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Market Trading

Seasonal Stock Market Trends:
The Definitive Guide to Calendar-Based Stock Market Trading
By Jay Kaeppel
John Wiley & Sons, Inc.
298 pages, $60

Repetitive patterns not only occur in nature and in life, but also in the stock market. Kaeppel, an author and stock market researcher for more than 25 years, has spent a decade studying long-term seasonal patterns and cycles. He found that certain patterns occur repeatedly and that observant investors and traders can profit from them.

The author urges readers to have an open mind and consider repetitive patterns that have both a rationale and unknown reason for their consistent performance over decades.

Kaeppel delineates seven patterns that provide significantly more profit than using the standard buy-and-hold approach. Specifically, Kaeppel covers the following patterns in detail: January barometer, holiday, monthly and yearly seasonality, time cycles (212 weeks, 40 weeks and 53 days). The presidential election cycle also is evaluated on the basis of monthly and yearly returns.

In each discussion of a particular seasonal event, he provides back-tested results over 50 or more years, using the Dow Jones Industrial Average (DJIA) because of its long history, and then adds other variables to further enhance the plain vanilla use of the pattern. The performance results are quite favorable compared to buy-and-hold, and in a few cases they are spectacular.

One chapter is devoted to the well-known and often dismissed “sell in May and go away” strategy. This extensive chapter provides insights into the strategy’s development by Yale Hirsch, as well as the addition of the MACD filter by Sy Harding. Results are shown for the performance of the DJIA (between May and the end of October), and for the Nasdaq using the period of October through June, as that is the best six months period that that index.

One astonishingly simple, yet extremely profitable strategy pointed out by Kaeppel, is to be out of the market in September of each year, and invested during the other eleven months. Using the Dow Jones Industrials Average for a 108-year period ending in December 2007, and measuring the return of buy-and-hold vs. investing for 11 months of the year, showed a return, respectively, of $199,142 for the former compared to $747,079 for the latter, using an initial $1000 investment amount. Amazingly, further gains occur by not investing in the month of October in years ending in “7.”

The last chapter provides a seasonal trading model incorporating 13 different criteria, each given a weighting of 1 to 4, and combined into a composite indicator. Specific entry and exit rules with the logic for the pattern, if known, are spelled out. Kaeppel then walks through the model with different composite readings from low to high, and then provides the performance data using long, long with leverage, and short. The results continue to get better with each strategy. One model shows a return of 539% vs. 113% for buy-and-hold from 1933-2007.

One surprising lack of detail by the author was not including a bibliography and footnotes.

This is a well-researched book with back-tested results on a subject that is surely to receive continued interest and scrutiny as way to earn competitive returns with less risk.

Leslie N. Masonson is the author of “All About Market Timing” and “Day Trading on the Edge.” E-mail him at lesmasonson@yahoo.com

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