The previous article, Long Term Investors Crazy Not to Sell in May?, we examined a basic Sell in May and Go Away strategy. This update will add an additional factor to the strategy, which is to use the 200 day simple moving average to keep the strategy out of the S&P when it is in bear market territory.
- Long $SPY from the close of the last trading day of October through the last trading day of April IF $SPY is above its 200 day simple moving average.
- Long VBLTX (Vanguard Long Term Bond Index Fund) from the last trading day of April to the last trading day of October.
- First day of test is 6.20.1996. Last day is 3.28.2013. First day is first day of history for VBLTX.
- No commissions or slippage included.
Note: I spent some time trying to find data for a bond index which would allow me to go back farther than 1996. I did not have any luck. If anyone knows of a suitable government bond / credit index (or mutual fund tracking such an index) with accessible data going back farther than 1996, please let me know.
The top pane is $SPY. The middle pane is the equity curve for the strategy. The lower pane shows the drawdowns in percentage terms. The blue portions of the equity curve represents time in $SPY while the green represents time in VBLTX. Compared to the basic strategy, adding the 200 day moving average requirement keeps the system in VBLTX for significant amounts of time.
Because of the way I coded his, all the trade information pertains only to the $SPY trades. The returns from VBLTX are built into the overall returns but are not considered to be trades.
If I subtract out the added return from VBLTX, the annualized return from just holding $SPY is 10.69%.
$SPY buy and hold over the same period is 5.26% with a maximum drawdown of -56.47%. So even if you do not rotate into a vehicle to provide a return on your cash, you still double buy and hold just by selling in May.
Historical Profit Table:
The strategy has performed unbelievably well, any way you slice it.
However, I have my doubts going forward. They are best encapsulated in a comment left by Kill The Banks, in the previous post:
I think there needs to be some evaluation of bonds as an appreciating asset class going forward. There was some blogoland chatter a few months ago regarding the “max theoretical gain” left in bonds (forget if it was the 10yr or the 30yr) and that number being around 17% total net or so (IIRC). Sentiment seems to be that given the current interest rate situation the only direction rates can really go is up, which translates into “bonds down”.
Me, I’d be wary of the forward usefulness of any methodology incorporating bond longs that has good backtest results.
With that comment in mind, what would we rotate into, if not for bonds? Is there another asset class that should be considered during the May – October seasonal period?