In my previous article I wrote about a simple “system” – if you can even call it that – that involves buying retailing stocks four months out of the year and holding cash the rest of the year. As ridiculously simple as that sounds the fact of the matter is that if you earned just 1% of annualized interest while out of retailing stocks, the system outperformed a buy-and-hold approach by a fairly wide margin.
While the results of that simple system aren’t bad, as always, one can’t help but to look for ways to improve things. So this article will detail what I refer to as – and by the way, this is what I sound like when I refer to myself in the third person – “Jay’s Energetic Market Shoppers” System, or JEMS (clever, no?) for short. The name is derived from the investment vehicles involved:
1. J stands for, well, OK, Jay….
2. E stands for “Energetic”: Energy stocks have showed a historical tendency to rally in the spring so we will hold Fidelity Select Energy (ticker FSENX) during the month of April (other possibilities include tickers XLE and ENPIX).
3. M stands for “Market”: The stock market tends to perform well during November, December and January. We are already planning to hold retail stocks during November, but for December and January we will hold an S&P 500 index fund. For the purposes of this test we will use the S&P 500 Index itself from 1988 into 1997. From there we will use the ETF ticker SPY. Someone who wanted to keep it all in the Fidelity family could use ticker VFINX. (Another possibility is ticker BLPIX).
4. S is or “Shoppers”: Just as with the original system, we will hold Fidelity Select Sector Retailing (ticker FSRPX) during February, March, October and November (other possibilities include tickers XLY and CYPIX).
During May, June, July, August and September we will hold cash.
So here is the “lineup”
January SPY
February FSRPX
March FSRPX
April FSENX
May Cash
June Cash
July Cash
August Cash
September Cash
October FSRPX
November FSRPX
December SPY
So how does it work out? Not too badly. Figure 1 displays the growth of $1,000 using the JEMS System versus buying and holding the S&P 500. 
Figure 1 – Growth of $1,000 using “Jay’s Energetic Market Shoppers” System versus buying and holding the S&P 500 since 1988.
Figure 2 displays the year-by-year results.
|
JEMS |
S&P 500 |
|
JEMS |
S&P 500 |
|
|
Annual % |
Annual % |
Difference |
$1,000 |
$1,000 |
|
|
1988 |
25.4 |
12.4 |
7.0 |
1,254 |
1,124 |
|
1989 |
12.4 |
27.3 |
(27.6) |
1,410 |
1,430 |
|
1990 |
12.2 |
(6.6) |
28.7 |
1,582 |
1,336 |
|
1991 |
36.6 |
26.3 |
(9.4) |
2,161 |
1,688 |
|
1992 |
27.7 |
4.5 |
16.6 |
2,760 |
1,763 |
|
1993 |
10.5 |
7.1 |
(0.1) |
3,050 |
1,888 |
|
1994 |
10.5 |
(1.5) |
0.7 |
3,369 |
1,859 |
|
1995 |
8.1 |
34.1 |
(31.1) |
3,642 |
2,493 |
|
1996 |
19.5 |
20.3 |
(2.1) |
4,353 |
2,998 |
|
1997 |
14.2 |
31.0 |
(18.4) |
4,970 |
3,927 |
|
1998 |
50.5 |
26.7 |
14.3 |
7,479 |
4,975 |
|
1999 |
42.4 |
19.5 |
(7.9) |
10,652 |
5,946 |
|
2000 |
(2.4) |
(10.1) |
19.4 |
10,400 |
5,343 |
|
2001 |
15.6 |
(13.0) |
16.8 |
12,027 |
4,646 |
|
2002 |
3.5 |
(23.4) |
36.9 |
12,450 |
3,561 |
|
2003 |
10.5 |
26.4 |
(16.6) |
13,755 |
4,500 |
|
2004 |
18.9 |
9.0 |
4.6 |
16,354 |
4,905 |
|
2005 |
(1.1) |
3.0 |
6.2 |
16,182 |
5,052 |
|
2006 |
14.8 |
13.6 |
(3.7) |
18,574 |
5,740 |
|
2007 |
2.4 |
3.5 |
(5.3) |
19,027 |
5,943 |
|
2008 |
(30.4) |
(38.5) |
7.0 |
13,237 |
3,656 |
|
2009 |
33.2 |
23.5 |
1.0 |
17,635 |
4,513 |
|
2010 |
32.5 |
12.8 |
14.0 |
23,366 |
5,090 |
|
2011 |
17.2 |
(0.0) |
14.0 |
27,381 |
5,090 |
|
2012 |
21.3 |
13.4 |
4.7 |
33,204 |
5,772 |
|
2013 |
16.7 |
29.6 |
(18.2) |
38,752 |
7,481 |
|
|
|||||
|
Average |
16.3 |
9.6 |
1.3 |
||
|
StdDev |
16.1 |
17.9 |
|||
|
Ave/SD |
1.011 |
0.540 |
Figure 2 – Year-by-Year Results
For the record:
-The JEMS System sported an average annual gain of +16.3%
-Buy/Hold sported an average annual gain of +9.6%
-$1,000 invested using the system grew to $38,752
-$1,000 invested using Buy/Hold grew to $7,481
-The JEMS system showed a gain in 23 of 26 calendar years (88.5%)
-The JEMS system showed a loss in 3 of 26 calendar years (12.5%)
-Buy/Hold showed a gain in 19 of 26 calendar years (73.1%)
-Buy/Hold showed a loss in 7 of 26 calendar years (26.9%)
-JEMS outperformed Buy/Hold in 15 of 26 calendar years (57.7%)
-Buy/Hold outperformed JEMS in 11 of 26 calendar years (42.3%)
Summary
So is the JEMS System the “world beater” system that everyone should be using? Well, on the plus side the long-term results are impressive relative to buy and hold. On the downside, there is still the sharp drawdown of 2008 that one would have had to continue to trade through. Also, the reality is that for most investors, a system like this involves more of a “leap of faith” than they are comfortable with.
Of course, as a proud graduate of “The School of Whatever Works” and as a founding member (OK, so far the only member) of “Seasonalaholics Unanimous!”……
………that’s just the way I like it.
Jay Kaeppel
I am disappointed to say that I never received my application for ‘Seasonalaholics Unanimous’ and am beginning to think that this must be an exclusive club of ONE!
As you have mentioned in prior posts, there has never been a better time to be a trader with all the various instruments available to trade. However, this does run the risk of picking those instruments and strategies that make a profit and discarding those that don’t. Inevitably this can lead to a form of system selection over optimisation, which may or may not be occurring with JEMS.
As you know, trading can be a very personal affair and for me I would need to understand why the retail and energy sector have performed well during the periods selected. Otherwise, it could be construed that there is an element of cherry picking with both these particular sectors and periods chosen.
With respect to the large number of seasonal systems that you have blogged about, are they part of a larger portfolio of seasonal systems that you trade or are you trading a smaller subset? Personally, I like the system creation process but I do not have the capital or inclination to trade every system that I have created.
Still waiting for your worldwide book signing tour in a city near me!
Ryan
Interesting to see this article. I pretty much came to the same conclusion after reading a series of your blogs, and started this system “officially” on 1 Jan, with some differences. 1) Instead of staying in retail the entire month of Nov, I will switch to SPY on the Friday close before Thanksgiving, 2) Instead of being in SPY the entire month of Jan, I will move to cash on TD 3, and 3) I will open TLT during Aug and Sep to take advantage of that dynamic.
So, since I “officially” began 1 Jan, I didn’t want to enter SPY on 2 Jan, and exit on 3 Jan, so this month I’m essentially in cash. Unless there is an extreme turnaround in the markets, then my first month looks like it will beat the S&P handedly.
I call this REBS (Retail, Energy, Bonds, S&P). As for how this will turn out in the long run, I’ll let you know in 4-5 years.
……. Jay, I love your articles, and still reference your book often even though I read it several years ago. I’ve just recently gotten into your KTI index and created a spreadsheet to track all the indicators. As a result, KTI was pointing bearish about 17 Jan, so I opened a Put on SPY. That turned out to be profitable. I’m hooked on seasonality……. Keith
of course ,you have left out the gold ,for Aug and Sept ( if you’re going to include energy)
surj
That’s for Jay’s Seasonal Sector Switching Strategy (Technology, Energy, Gold, Cash). Similar to JEMS system above.
Nice system, Jay. On a different note, I’m sure you’ve noticed that your “Jaynewary Indicator” is looking bearish? Unless there’s a big reversal today, it looks like Jaynewary will have a 0 for 3 reading (the most bearish).