Investing Only in Winter Trading Strategy – (Backtest, Setup, Rules, Performance Analysis)

There are many seasonal patterns in the US market. For example holiday effects, the end of month effect, the first day of month, and, of course, the ‘Sell in May and go away’ strategy. However, there is also a investing only in winter seasonality.

However, today we will be looking at a variation of the ‘Sell in May and go away’ seasonal pattern using International stock ETFs. The question we asked ourselves is: Does the stock market perform best during winter?

In this article we are going to look at another way to look at the ‘Sell in may and go away’ pattern, develop a seasonal trading strategy and backtest the idea.

Related reading:

Seasonalities in International stock ETFs

There is a pretty popular seasonality pattern in the market called ‘sell in May and go away’ (until October). As you probably know, the performance during these months tends to be lower than in the period from November till April. 

Given that the period between May and October corresponds primarily to summer in the US we thought about backtesting the performance of avoiding investing in countries when it is summer and only invest during winter.

This means that instead of selling and holding cash, during May till October we would invest in countries where it is not summer, unlike the US, such as Australia and Latin America.

One of the reasons why this might work is because investors and money managers are on vacations or not working so hard during the months of the summer (?), hence the activity is lower. However, is hypothesis true? The only way to answer this is to create a strategy and do a backtest.

Investing only in Winter – trading rules

The trading rules of this strategy are pretty simple:

  • From November until April we invest in countries where it is winter such as the United States, Japan and Europe.
  • From May until October we invest in countries where it is winter such as Australia, South Africa and Latin America.

Investing only in the Winter – backtest

We create two portfolios, both equally weighted: 

  • The first one, the ‘North Portfolio’, includes the SPY, EWJ and VGK.
  • The other one, the ‘South Portfolio’, is composed of ILF, EWA, and EZA.

We started the backtest in 2005. The data is adjusted for dividends. Here is the equity curve:

Investing only in winter trading strategy

Here are some metrics and performance statistics:

  • CAGR is 4.01% (SPY buy and hold is 9.19%)
  • Maximum drawdown is 64.34%
  • Standard deviation is 25.14 (SPY is 19.50)

The strategy did not perform as we would have expected. It turns out, the ‘Sell in may and go away’ isn’t about summer or winter, it’s about the actual period between the months May and October.

Moreover, there is much research and papers that confirms the existence of this pattern not only in the US, but also in other equity markets around the world.

Consider the following table. It shows the average monthly return in the May-October period and the November-April period.

In all ETFs the ‘Sell in May and go away’ pattern confirms itself.

Investing only in winter strategy backtest and performance

Investing only in the Winter  – conclusion

To sum up, there is no summer or winter effect in stocks.

We backtested a trading strategy where we invested only when it’s winter, meaning we rotated between two portfolios composed of ETFs of two different parts of the world, and it didn’t work well. Also, we confirm that the ‘Sell in May and go away’ pattern works not only in the US, but also internationally. 

FAQ:

What is the ‘Sell in May and go away’ seasonal pattern?

The ‘Sell in May and go away’ is a seasonal investing pattern where investors tend to reduce their exposure to the stock market, typically from May to October. The strategy suggests that performance during these months tends to be lower than from November till April.

How does the ‘Sell in May and go away’ pattern work internationally with ETFs?

The article explores a variation of the ‘Sell in May and go away’ pattern using International stock ETFs. Instead of selling and holding cash during May-October, the strategy involves investing in countries where it is winter, such as Australia and Latin America.

What is the hypothesis behind investing only during winter in different countries?

The hypothesis is that during the summer months, particularly May to October, investor activity might decrease due to vacations or reduced working hours. The strategy aims to capitalize on potential market inefficiencies during these periods.

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