In a previous article, we presented an S&P 500 and gold rotation strategy. Today we test a sector rotation strategy between S&P 500 and gold miners. Let’s call the strategy an S&P 500 and gold miners rotation strategy. The logic behind the strategy is based on this:
The stock market has a strong seasonality from October to May, while gold and gold miners outperform the rest of the months. Can this be used to construct a tradeable S&P 500 and gold miners rotation strategy?
The S&P 500 and gold miners rotation strategy outperforms buying and holding the S&P 500 by a wide margin, but the best years were prior to the GFC in 2008/09.
S&P 500 seasonalities:
Seasonal trading strategies work well. We have covered the strong seasonal tendency for the S&P 500 to accumulate practically all the gains over the last 60 years from October until the end of April.
Opposite, the gold price and gold miners, which often go in the opposite direction of the stock market, have performed well during the summer doldrums of the S&P 500.
Both of these two seasonalities are no outliers. They have been consistent for decades. However, there is no guarantee it will continue.
Previous sector rotation strategies:
Before we go on to backtest the S&P 500/gold miners rotation strategy, we want to give a humble reminder of the previous rotation strategies we have published free of charge:
- Monthly momentum in SPY and TLT (rotation strategy)
- A monthly momentum strategy in ETFs (rotation strategy in TLT, SPY, and EEM)
Rotation strategy between the S&P 500 and gold miners
We test the S&P500 and gold miners rotation strategy by using data from Yahoo!finance: ^gspc for the S&P 500 and FSAGX as a proxy for the gold miners.
FSAGX is the ticker code for the Fidelity mutual fund that invests in gold mining stocks. We use this as a proxy because we get access to data back to 1985. We have no idea if FSAGX is a useful trading vehicle. Commissions and fees might make it useless for trading, so it only serves as an example in this article.
We also remind you that ^gspc is not adjusted for dividends and thus underrates the performance of stocks because it omits dividend reinvestments which is a crucial component for compounding great long-term results.
The current main holdings in Fidelity’s gold mining fund are these:
| Newmont Corp | NEM | 15.22% |
| Barrick Gold Corp | ABX.TO | 11.55% |
| Franco-Nevada Corp | FNV.TO | 9.82% |
| Wheaton Precious Metals Corp | WPM.TO | 6.75% |
| Agnico Eagle Mines Ltd | AEM.TO | 5.59% |
| Kirkland Lake Gold Ltd | KL.TO | 4.03% |
| Northern Star Resources Ltd | NST.AX | 3.73% |
| Zijin Mining Group Co Ltd Class H | 02899 | 3.44% |
| Kinross Gold Corp | K.TO | 3.24% |
| Evolution Mining Ltd | EVN.AX | 2.71% |
We backtest the following:
- At the close of September, we buy the S&P 500 (^gspc).
- We hold the S&P 500 until the first day of May and we sell on the open.
- At the open in May, we invest in FSAGX (this is a fund so, in reality, you need to buy at the close of April).
- We own FSAGX until the last day of September when we sell on the open of October.
- Rinse and repeat every year from 1985 until June 2021.
The equity curve looks like this:
We start with 100 000 and let it compound for 35 years. The CAGR is 12.3% and the max drawdown is 59% (in GFC 2008/09). The CAGR is better than the 10% dividend reinvested return for the S&P 500. Bear in mind that the CAGR of the strategy is higher if we had reinvested the dividends.
If you want the Amibroker and Tradestation code for the above strategy plus 80+ others of the free strategies we have presented on this page, click here:
S&P 500 and gold miners rotation strategy – conclusion:
The simple S&P 500 and gold miners rotation strategy performs very well with a CAGR of 12.3%. However, it seems the best years were prior to 2009.
