Kaeppel's Corner: If it's March Going on April, I Must Still Like Energy

Jay Kaeppel, Optionetics.com
March 22, 2011

Several years ago I detailed a system that I developed in the 1990’s for trading Fidelity sector funds that I have since titled “Jay’s Seasonal Sector Switching Strategy” (I just love a good tongue twister don’t you?). So just to make life easier, I will heretofore refer to this system simply as “4S” (although I would appreciate it if you referred to as is “Jay’s 4S” rather than “Bob’s 4S” or “Mary’s 4S” or [You Name Here]’s 4S”). Like any other system it is far from perfect and has had its share of “downs between the ups.” But all in all it has more than held its own. So let’s review.

The 4S System

To say that “simplicity” is one of the benefits of 4S might be a bit of an understatement. Essentially the system holds technology for three months, energy for four months, gold stocks for one month and cash for four months. The “schedule” is displayed in Figure 1 (including ETF alternatives to Fidelity funds).

Month
Sector (Fund)

January
Technology (FSPTX or ETF ticker XLK)

February
Energy (FSENX or ETF ticker XLE)

March
Energy (FSENX or ETF ticker XLE)

April
Energy (FSENX or ETF ticker XLE)

May
Energy (FSENX or ETF ticker XLE)

June
Cash

July
Cash

August
Cash

September
Gold (FSAGX or ETF ticker GDX)

October
Cash

November
Technology (FSPTX or ETF ticker XLK)

December
Technology (FSPTX or ETF ticker XLK)

Figure 1 – Jay’s 4S Switching Calendar

To explain:

-At the close every October 31st the portfolio switches into technology stocks. That position is held for three months

-Then at the close on January 31st, tech stocks are sold and the money is moved into energy stocks.

-At the close on May 31st energy stocks are sold and the proceeds are moved to cash.

-On August 31st gold stocks are bought and held for one month.

-At the close on September 30th the portfolio is moved back into cash for one more month and then the cycle starts again.

Too simple to be useful? Consider the results and decide for yourself.

4S: The Results

Figure 2 displays the annual profit or loss achieved by 4S. Obviously 1998 and 1999 inflate the longer term average, still the average annual return has been +30.1% including those two years and a still well above average +15.6 without them.

Figure 2 – 4S Year-by-Year Results

For the record, between 10/31/89 and 3/18/11:

-$1,000 invested using this system grew to $119,618 (or +1,195%).

-$1,000 invested in an S&P 500 index fund grew to $3,758 (or +276%).

Figure 3 displays the growth of equity on a month-end basis. As I mentioned earlier there are clearly some downs along the way. So 4s may not be appropriate for widows and orphans (unless of course a given widow or orphan is smart enough to see the potential benefit of committing some part of their investment capital to a simple to use investment methodology that has displayed the potential to achieve better than average long-term results – but there I go being pragmatic again).

Figure 3 – 4S Monthly Equity Curve

The Caveat

I first developed this method sometime in mid-1998. It looked at the time like one of those “too good to be true” methods. Then between 8/31/1998 and 8/31/2000 it gained another 671%. So I started showing it to a few people (it typically went like this - "pssst, hey buddy, wanna see a sector switching system?" "Get lost you weirdo!") while trying to constrain my expanding ego. And then of course, Murphy’s Law being what it is (i.e., a giant pain in the you know what and no I don’t mean “neck”), my “World Beater, You Can’t Lose Trading Sector Funds System” (heretofore referred to just this once as WBYCLTSFS) experienced what I refer to as “40 in 4.” Translated, that means the system lost a staggering 40% in just four months time. Ouch (I hate Murphy almost as much as Murphy hates me)!

Yes, you read that correctly. This system once lost 40% in just four months time. Now for most people, that is enough to make them simply say “no thanks” and never look back. Actually, for most people it is enough to make them run away screaming. And understandably so. But in this case, mores’ the pity.

For even including the four month meltdown the performance of the system between 10/31/89 and 12/31/00 versus the S&P 500 was as follows:

4S = +2,127%

S&P 500 = +288%

And the results generated by the 4S system since 12/31/00 versus the S&P 500 reads as follows:

4S = +437%

S&P 500 = -3%

Interestingly, the 40%, four month decline looks like just a blip about halfway across Figure 3. So the point here is that even you had started at the exact worst time (8/31/00) and experienced an admittedly stunning -40% decline in your account equity in the first four months, you would still be up +253% since August of 2000. During the same time the S&P 500 has lost -16%.

Summary

So is now the ideal time to “pile in” or is another “40 in 4” just around the corner? Sadly I can’t answer that. Will energy stocks perk up and close out the February through May period higher than where they stand today? Wow, you ask a lot of tough questions. I can’t answer that one either. Interestingly, the question I get most often is “how’s it doing this month?”

Given the long-term results (and isn’t that what we are all supposed to be focusing on anyway?) do the answers to any of these questions really matter?

As always, time will tell.

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

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