Invest in global stocks from November to April, hold cash from May to October. Alternatively, go long on Northern Hemisphere stocks in winter, Southern Hemisphere in summer. Or invest cyclically in winter, defensively in summer.
ASSET CLASS: CFDs, ETFs, funds, futures | REGION: Global | FREQUENCY: Semi-annually | MARKET: Equity | KEYWORD: Seasonality
STRATEGY IN A NUTSHELL
Invest in global stocks from November to April, then hold cash from May to October. Alternatively, consider going long on Northern Hemisphere stocks in winter and Southern Hemisphere stocks in summer. Another option is to invest in cyclical companies during the winter months and short defensive stocks, then switch positions during the summer. This strategy allows for adapting to seasonal market trends and potentially maximizing returns based on geographical or sectoral variations.
ECONOMIC RATIONALE
Value and momentum strategies are extensively studied, offering two potential explanations. Firstly, Kamstra, Kramer, and Levi (2003) or Garret, Kamstra, and Kramer (2004) suggest a seasonal pattern driven by the Seasonal Affective Disorder (SAD) effect, where winter depression reduces risk tolerance. Psychological literature links SAD to shorter days in fall and winter, inducing depression and risk aversion, impacting stock returns seasonally, termed the SAD effect. Alternatively, seasonal results may arise from an optimism cycle. Towards the year-end, investors optimistically anticipate the coming year, initially yielding attractive stock returns. However, reality sets in after a few months, leading to investor pessimism and a summer market lull. Psychological factors play a role, urging investors to overweight equities from November to April and underweight them from May to October.
SOURCE PAPER
The Optimism Cycle: Sell in May [Click to Open PDF]
”Ronald Q. Doeswijk”, ”Independent Researcher”
<Abstract>
The market maxim “Sell in May and go away” is a simple but profitable one. On average, stocks deliver close to zero returns in the six month period from May through October, only giving a risk premium from November through April. This effect, however, has not been widely covered in academic literature. We examine the hypothesis that the seasonal pattern is caused by an optimism cycle. Towards year end, investors start to look towards the new year, often with overly optimistic expectations. This results in attractive returns for stocks. Several months into the year, this initial optimism becomes hard to maintain and the stock market experiences a summer lull. A zero-investment global sector-rotation strategy based on this theory appears to be highly profitable. Global earnings growth revisions also follow a seasonal pattern parallel to that of the stock market. Finally, in a separate analysis for the US stock market, investors’ optimism as measured by the initial returns on IPOs almost completely capture the results of the sector-rotation strategy. All these findings support the optimism-cycle hypothesis.
BACKTEST PERFORMANCE
| Annualised Return | 8.8% |
| Volatility | N/A |
| Beta | 0.505 |
| Sharpe Ratio | 0.221 |
| Sortino Rato | 0.161 |
| Maximum Drawdown | 36.6% |
| Win Rate | 79% |
FULL PYTHON CODE
from MyAlgos import *
class SeasonalEquityStrategy(XXX):
def Initialize(self):
self.SetStartDate(2005, 1, 1)
self.SetCash(100000)
self.AddEquity("AAPL", Resolution.Daily)
self.AddEquity("GOOG", Resolution.Daily)
self.Schedule.On(self.DateRules.MonthStart("AAPL"), self.TimeRules.AfterMarketOpen("AAPL"), self.Rebalance)
def Rebalance(self):
if self.Time.month == 6:
self.Liquidate("AAPL")
if self.Time.month == 12:
self.SetHoldings("AAPL", 1)