In my last piece I got “down in the weeds” a bit and detailed something known as the 40-Week Cycle in the stock market. This follow-up fits under the category of “there’s more than one way to skin a cat” (which is one of those old sayings that is actually kind off disgusting if you stop and think about it for any length of time – so my advice is to just keep reading).
(See also The One Asset Class Per Month Strategy)
Using Sectors instead of an Index
The original article implied that an investor would have done much better holding an S&P 500 Index fund only during the 1st 20-weeks of each 40-week cycle. In this piece we will look at one alternative using sectors funds.
First off – and as always – this blog does NOT offer investment advice, only trading and investment ideas. So nothing that follows should be construed as something you should rush right out and act upon. This is especially true of the sector based idea I will discuss next. The method should be thought of more as “food for thought” or even a “good starting point” than as a “system.” With that in mind, it goes like this:
*After the close of the day before a new 40-week cycle starts, I run the AIQ TradingExpert Relative Strength – Strong Short Term Report (See Figure 1).
*I ignore gold (ticker FSAGX) and real estate (FRESX) as these sectors are typically affected by factors not closely related to the action of the S&P 500.
*The top-ranked sector (excluding FSAGX and FRESX) is bought and held at the close the next day.
*The fund is held until the end of the first 20 weeks of the 40-week cycle, OR until the Dow Jones Industrials Average registers a close that is 12.5% or more below its price on the day the new 40-week cycle began.
Figure 1 – AIQ Relative Strength – Strong Report (Courtesy AIQ TradingExpert)
One more ancillary rule: In a stock market decline, it is possible to have no sector funds show up in the Relative Strength – Strong report. In that case, I go to the AIQ Relative Strength – Week Short Term Report and select the sector fund at the very bottom of the list (i.e., the “least weak” performer) – once again FSAGX and FRESX are excluded.
Figure 2 – 40-week cycle sector trade (FSNGX); 5/13/2016-9/30/2016 (Courtesy AIQ TradingExpert)
Caveat: Remember, this “method” is NOT a recommendation. Any system or method that says I am going to buy and hold one single sector fund for roughly four and a half months regardless, is inarguably fraught with peril. So why do I bother to bring it up? Well, see the results in Figure 3.
(See also With Retailers, it’s ‘When’ Not ‘What’)
| Entry Date | Exit Date | Fund | Sector % +(-) | SPX
%+(-) |
Difference | $1,000 in sectors becomes | $1,000 in SPX becomes |
| 12/31/87 | 05/20/88 | FIDSX* | 16.9 | 0.7 | 16.2 | 1,169 | 1,007 |
| 10/07/88 | 02/24/89 | FSHOX | 10.2 | 4.4 | 5.8 | 1,288 | 1,052 |
| 07/14/89 | 12/01/89 | FSHCX | 14.5 | 7.5 | 7.0 | 1,475 | 1,130 |
| 04/20/90 | 09/07/90 | FSELX | (6.8) | (2.8) | (4.0) | 1,374 | 1,098 |
| 01/25/91 | 06/14/91 | FSPTX | 14.3 | 12.8 | 1.5 | 1,570 | 1,239 |
| 11/01/91 | 03/20/92 | FBIOX | (8.9) | 7.2 | (16.1) | 1,430 | 1,328 |
| 08/07/92 | 12/24/92 | FSVLX | 15.0 | (0.2) | 15.2 | 1,646 | 1,326 |
| 05/14/93 | 10/01/93 | FSESX | 15.1 | 4.0 | 11.1 | 1,894 | 1,379 |
| 02/18/94 | 07/07/94 | FSHCX | (3.4) | (5.1) | 1.8 | 1,830 | 1,308 |
| 11/25/94 | 04/13/95 | FSDCX | 7.9 | 13.5 | (5.6) | 1,974 | 1,485 |
| 09/01/95 | 01/19/96 | FSELX | (10.4) | 11.6 | (22.0) | 1,768 | 1,657 |
| 06/07/96 | 10/26/96 | FSRPX | (1.4) | 5.4 | (6.9) | 1,743 | 1,747 |
| 03/14/97 | 08/01/97 | FSLBX | 25.7 | 18.1 | 7.6 | 2,191 | 2,064 |
| 12/19/97 | 05/08/98 | FSLBX | 21.3 | 16.7 | 4.5 | 2,658 | 2,409 |
| 09/25/98 | 02/12/99 | FDCPX | 45.2 | 15.5 | 29.7 | 3,859 | 2,783 |
| 07/02/99 | 11/22/99 | FSESX | 8.0 | (0.4) | 8.4 | 4,166 | 2,771 |
| 04/07/00 | 08/25/00 | FSELX | 19.7 | 0.7 | 19.0 | 4,989 | 2,791 |
| 01/12/01 | 06/01/01 | FSHCX | 6.6 | 4.4 | 2.2 | 5,317 | 2,914 |
| 10/19/01 | 03/08/02 | FSMEX | 1.9 | 14.9 | (12.9) | 5,420 | 3,347 |
| 07/26/02 | 12/13/02 | FSCHX* | (2.6) | 2.0 | (4.6) | 5,279 | 3,416 |
| 05/02/03 | 09/19/03 | FSUTX | 8.1 | 12.4 | (4.3) | 5,708 | 3,839 |
| 02/06/04 | 06/25/04 | FSDCX | (10.1) | (2.1) | (8.1) | 5,129 | 3,759 |
| 11/12/04 | 04/01/05 | FSRFX | 1.0 | (1.3) | 2.3 | 5,180 | 3,711 |
| 08/19/05 | 01/06/06 | FSESX | 23.3 | 3.8 | 19.5 | 6,388 | 3,851 |
| 05/26/06 | 10/13/06 | FSHCX | 6.0 | 6.0 | (0.0) | 6,773 | 4,084 |
| 03/02/07 | 07/20/07 | FSNGX | 25.1 | 14.3 | 10.8 | 8,474 | 4,670 |
| 12/07/07 | 04/25/08 | FDFAX | (3.9) | (5.4) | 1.5 | 8,144 | 4,418 |
| 09/12/08 | 10/6/2008** | FSRPX** | (19.6) | (30.0) | 10.4 | 6,549 | 3,095 |
| 06/19/09 | 11/06/09 | FSAVX | 36.4 | 17.4 | 19.0 | 8,929 | 3,632 |
| 03/26/10 | 08/13/10 | FSAIX | (5.0) | (5.0) | 0.0 | 8,480 | 3,449 |
| 12/31/10 | 05/20/11 | FSESX | 7.4 | 8.1 | (0.7) | 9,106 | 3,728 |
| 10/07/11 | 02/24/12 | FSRPX | 11.7 | 16.9 | (5.3) | 10,167 | 4,359 |
| 07/13/12 | 11/30/12 | FBIOX | 4.4 | 1.9 | 2.5 | 10,617 | 4,444 |
| 04/19/13 | 09/06/13 | FBIOX | 17.9 | 2.6 | 15.4 | 12,521 | 4,558 |
| 01/24/14 | 06/13/14 | FBIOX | (5.0) | 5.6 | (10.7) | 11,894 | 4,815 |
| 10/31/14 | 03/20/15 | FBIOX | 29.5 | 4.2 | 25.2 | 15,398 | 5,020 |
| 08/07/15 | 12/25/15 | FSRPX | 5.9 | 1.0 | 4.9 | 16,312 | 5,071 |
| 05/13/16 | 09/30/16 | FSNGX | 17.5 | 4.4 | 13.1 | 19,170 | 5,295 |
Figure 3 – 40-Week Sector Method versus SPX
*- Sector fund chosen from bottom of Relative Strength – Weak Report
**- Stopped out early following Dow Industrials 12.5% stop-loss
Note: The results presented in Table 3 are calculated using closing price data from eSignal and/or Finance.Yahoo.com and do not represent total return data.
For the record:
-The Sector Method outperformed SPX 25 times (66%)
-The Sector Method underperformed SPX 13 times (34%)
-The average gain for the Sector Method was +8.9%
-The average gain for SPX was +4.9%
-$1,000 invested using the Sector Method grew to $19,170 (+1,817%)
-$1,000 invested using the Sector Method grew to $5,295 (+429%)
The bottom line: So far the selected fund has outperformed SPX 2 out of every 3 trades and every once in awhile you get an outsized big winner. As always, past results do not guarantee future results,so be forewarned.
Summary
So is the 40-Week Cycle Sector Method the key to riches beyond the dreams of avarice? Hardly. In fact it ranks more closely as “High Risk/High (Potential) Reward”, or even better as “a good place to start for someone looking for new and unique ways to attach the market.”
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
