Here's a simple stock-market timing system you can use that beats all the others

By Mark Hulbert

'Seasonality Timing System' shifts into and out of stocks using nothing more than the calendar

The best stock market timing system of four decades ago is still beating a buy-and-hold approach. That's remarkable for at least two reasons: First, it's rare for any market timing system to outperform over any several-year period, and second, it's even rarer for a successful system to continue beating the market after it's been discovered by investors.

Yet the Seasonality Timing System created by Norman Fosback has overcome both of these odds. It was created in the 1970s, when Fosback was head of the Institute for Econometric Research. The system bases its signals on nothing other than a 12-month calendar, and there is no guesswork involved. It calls for being invested in the U.S. stock market around the turns of the month and immediately prior to stock exchange holidays - and in a money market fund the rest of the time.

Fosback in the early 1980s claimed it was the best stock market timing system ever created, and my Hulbert Ratings performance-auditing firm largely supported that claim. It at the time had one of the best risk-adjusted performance of any of dozens of monitored market-timing strategies my firm tracked, and that remains true.

The chart below plots the trailing five-year annualized returns of Seasonality Timing System (STS) as well as of a buy-and-hold approach. There are two aspects of the chart to focus on:

For most of the past four decades, the STS trailing five-year return was close to that of a buy-and-hold approach. That in itself is noteworthy, since only for a fraction of the time is the system invested in equities and exposed to the risk of the stock market. On a risk-adjusted basis, the STS has beaten the market over the majority of rolling five-year periods since the mid-1980s.Even more impressively, the STS has beaten a buy-and-hold on a raw, unadjusted basis over the past five years - and it therefore comes out ahead by an even greater margin on a risk-adjusted basis. Over the five years through the end of March, according to my auditing firm's calculations, the STS has produced a 17.6% annualized return, versus 14.6% for buying and holding. Moreover, on a risk-adjusted basis it doubles the market's return.

Many investors don't care about risk-adjusted performance and look at raw return. That's short-sighted. Because the STS incurs only a fraction of the market's risk, you could afford to allocate a much greater portion of your equity portfolio to following it than you would to a broad stock market index fund. In that case you would take on no more risk than the market and your raw return would be far greater.

What's the catch?

Is there a catch to the STS? The main one I'm aware of is that the STS is boring. By being invested in cash the majority of the time, the strategy sidesteps most of the stock market's day-to-day excitement. While you might think that's a virtue, you'd be surprised how many investors are addicted to that excitement and miss it when they're not in it.

A related catch is that the system is not a get-rich-quick scheme. It's a slow-and-steady approach that gradually beats the market over the longer term. You might think patience is a virtue, but many investors are unwilling to sit with a system like the STS while their peers hit the jackpot.

Another potential catch is that no system works forever. Eventually enough investors discover a profitable system and, by investing according to it, kill the goose that lays the golden egg. This has not happened with the STS, which I suspect is due to how dull it is and how much of a long-term commitment is needed to profit from it.

Nevertheless, if you have the patience and discipline, the STS is worth considering. It currently is in cash, and will not get back into the stock market until the last two trading days of this month.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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04-13-24 0835ET

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