SAPA Strategy™

Wall Street also tells us the market can't be timed, so don't try it, just buy any time and suffer the damage if the time isn't right. But there is a simple method of timing the market - seasonal timing. It's not only easy to understand but has a very logical reason for working.

It first defines an earliest possible entry date, and an earliest possible exit date. It then applies the short-term momentum reversal indicator to pinpoint the entries and exits as that earliest possible entry date approaches. An example of how it works at the entry: If the momentum reversal indicator tells me a rally is underway when the earliest possible entry date arrives, I simply enter then. If the momentum reversal indicator remains on a sell signal when the earliest possible entry date arrives, I simply wait to enter until the correction ends, as signaled by the next buy signal on the indicator. At the exit in the spring, if the technical indicators are pointing towards a short-term sell signal when the earliest possible exit date arrives, we exit then. But if they remain on a buy signal when the earliest possible exit date arrives, we simply remain in until it triggers its next sell signal. In that manner the favorable season or the unfavorable season can vary from 4 to 8 months, depending on what the market itself is doing at the time. All other short-term buy and sell signals which are indicated in the actively traded "Index Trading & Sectors" section of the website are ignored. The results speak for themselves in the back-tested data in the SAPA CD/ROM presentation.

The strategy is a mechanical strategy based solely on the calendar and several technical indicators that give a buy or sell signal.

Why SAPA Strategy™ works.

As the market enters the fall, and continuing into the spring, investors begin receiving chunks of extra cash. The extra cash comes in the form of November and December capital gains distributions from mutual funds, 3rd and 4th quarter dividend distributions from corporations, employers' contributions to employee's 401K and pension plans for the year, Christmas bonuses, year-end bonuses, income tax refunds in the spring, etc. Additionally, small business owners close their books at the end of each year, and by February or March their accountants have let them know what their profits were, and they then distribute those profits to themselves.

Much of that extra cash finds its way into investments, notably the stock market, driving prices higher.

However, in the spring of the year the flow of extra chunks of money dries up, depriving mutual funds and investors of the extra money to buy the dips, while many also begin selling stocks and mutual funds to raise money to pay taxes, for vacations, etc. Both activities leave the market much more susceptible to corrections until the next favorable money-flow season begins in the fall.

The strategy not only made more than 7 times the gain of the Dow, and 10 times the gain of the S&P 500 over the last six years, with half the risk of buy and hold, but also allows investors to participate in the market without concern for valuation levels, and without the need to define whether the market is in a bull or bear phase. The strategy has worked in bear markets and bull markets, because historically even bear market rallies tend to take place primarily in the favorable seasonal periods (because investors still get their chunks of extra cash during those periods).

Use of the SAPA Strategy™ mechanically would have turned a $1,000 portfolio into $1,077,250 over the 43-year period. And it made those outstanding gains while taking an average of only 50% of the risk of buy and hold investing. Buy and hold investing of the DJIA over the same period would have turned a $1,000 portfolio into only $17,433 over the same period. (SAPA Strategy™ produced 3.2 times as much gain, with 50% of market risk).

6-Year Graphic of SAPA Strategy™ Buy and Sell Signals

What happened in 2003?

Should we throw the SAPA Strategy™ out the window because it under-performed the market in 2003? If our approach each year was to switch to whatever strategy worked best the previous year, the answer would be yes. However, following whatever worked best the previous year is the most popular investment strategy in existence, and is far from a discipline, which is what I believe the SAPA Strategy™ is…a discipline. Following whatever worked best the previous year is what also prompts investors to buy whichever stocks, mutual funds, or 401(k) sub-accounts had the biggest gains for the previous year (even though that means they most likely have already become overvalued). Similar rear-view investing is what leads investors to buy at or near rally or market tops, and only sell after they see large losses took place over the previous year.

With any discipline, I would tend to focus on the long-term performance of SAPA Strategy™ before deciding that its underperformance this past year is reason to throw it out. Despite 2003's underperformance, SAPA Strategy™ has had an average annual return of 14.42% over the last 6 years using the S&P 500 (SPY), an average annual return of 16.57% using the Dow Jones (DIA) and 34.73% using the Nasdaq (QQQ). SAPA Strategy™ has significantly outperformed the market over the last 2-year, 3-year, 4-year, 5-year, and 6-year periods, based on following the strategy rules mechanically.

Some Additional Facts

1. With 50 years of back testing, SAPA Strategy™ had losses during its favorable season in only five of the last 43 years, with the largest loss being 5.59% in 1970.
2. The market had the same five losses that SAPA Strategy™ had in the market's favorable season, but it also suffered losses in an additional 18 years during its unfavorable season when SAPA Strategy™ was in cash, for a total of 23 losing periods.
3. Even in the severe bear market of the last three years the market SAPA Strategy™ still made small gains in its favorable seasons.