A Seasonal Biotech Portfolio Alternative To ‘Sell In May’

By | November 9, 2015

Scalper1 News

Summary The common sense strategy of sell in May fails to beat a buy-and-hold ETF strategy. I tested an alternative seasonal strategy to find it safer, but not better than the buy-and-hold strategy. Modifying the seasonal strategy to allocate capital to biotech instead tech beats the buy and hold strategy in at least two ways. This article is a return to the “sell in May” philosophy, which I previously outlined here . As it is now November, those who subscribe to this philosophy are getting ready to enter the market. If you are one such investor, I implore you to first read the following article, in which I show you how the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) can more than double the effectiveness of your strategy. Sell in May The first thing I want to do is set a benchmark to which I will compare the portfolio strategy I plan to introduce here. Let’s take it a step further and use two benchmarks: buy and hold and sell in May. Buy and hold: Buy the SPDR S&P Trust ETF (NYSEARCA: SPY ) and continue holding, never selling Sell in May: Buy the SPY in October and switch to Treasury bills in May As you can see from the figure below, the buy and hold strategy actually beats the sell in May strategy over the past 10 years. This only bolsters my original article that states the sell in May strategy only holds is special occasions and should not be relied upon in the long-term. The upside is that you protect yourself a bit from the drawdowns, but as you’ll see in a bit, an even better strategy exists. So let’s stop with the mystery and great straight to the strategy… after one more portfolio strategy introduction. In this article , a different type of seasonality-based portfolio strategy is introduced. You can skip reading the article, as I’ll explain it in a nutshell in the following section. Kaepple’s seasonality Kaepple states that his extensive research of market seasonality led him to three main conclusions. First is to buy tech stocks during the market rally season, typically November to January (that’s now!). Second is to switch over to energy stocks during the winter. Then, in May, switch to cash (or bonds). In September, get into gold for one month, and then switch back to cash. I wondered how this strategy would do compared to the buy-and-hold and sell in May strategies. So, I ran a backtest. The strategy follows: November to January: Buy the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) February to May: Buy the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) June to August: Stay out of the market September: Buy the SPDR Gold Trust ETF (NYSEARCA: GLD ) November: Stay out of the market Here are the results of this strategy: As you can see, the results of this strategy were better than the buy-and-hold strategy. Not in performance – they both performed equally well. However, this strategy reduced the drawdown and showed a stable upward trend. This portfolio allocation strategy could have protected you from much of the damage that most investors suffered in 2008. In addition, although we were in specific sectors via XLK and XLE, this portfolio was less volatile than simply buying the SPY. That is, this is a safer portfolio allocation strategy with fewer downsides. But couldn’t hedging do the same? After all, this strategy didn’t outperform the buy-and-hold strategy. But what if we focused on an even more specific sector during the market rally period? Choosing an individual stock, of course, would be too risky, as you’d be putting all your eggs in one basket. But what about focusing on a very specific subsector of the tech sector? My thoughts immediately turned to biotech, of which there are several good ETFs. Though I am long on the ALPS Medical Breakthroughs ETF (NYSEARCA: SBIO ), this ETF is relatively new, precluding it from backtesting. Instead, I reached for the next best thing: the iShares Nasdaq Biotechnology ETF . Thus, the new strategy invests in IBB from November to the end of January. The results follow. Now we’re talking! Half the max drawdown of the buy-and-hold strategy with double the cumulative gains! In addition, just like the original sector portfolio strategy with the XLK, this portfolio would have weathered the 2008 storm. Conclusion for Investors The conclusion is basically in the last image – a strategy that switches into different sectors of the market throughout the year is safer than an index fund and brings in double the revenue. (Devil’s Advocate: How does this compare to buying and holding IBB? Answer: Same cumulative returns with 30% lower max and average drawdowns.) As the first backtest shows, buy and hold beats sell in May but an IBB-focused seasonal strategy beats them both with no obvious disadvantages. Anyone using a seasonal strategy such as the “sell in May” strategy should reconsider how they play this game. If you’re looking for something easy, this is your four-trade-a-year investment strategy. And it should be rather cost effective to switch four times a year. No, it’s not a flamboyant investment strategy but it beats most mutual funds. If you’re interested in seeing some tweaks to this strategy, ask me in the comments section or via mail. I’ll be rolling out my premium Seeking Alpha backtesting newsletter soon, in which I backtest your strategies. Before I launch it, I’m willing to run a backtest on your portfolio allocation strategy or trading strategy per gratis. Request a Statistical Study If you would like for me to run a statistical study on a specific aspect of a specific stock, commodity, or market, just request so in the comments section below. Alternatively, send me a message or email. Scalper1 News

Scalper1 News