Election Fever (Part 2)

Last week we wrote about the shorter-term historical precedent with market performance, specifically the two months leading up to and the two months following the last four election dates.  Now let’s widen the scope to a galactically greater degree: in years rather than days and starting way back with Andrew Jackson’s presidential term (yes, the 1830’s).

We’ve been long-term followers of Jeffrey and Yale Hirsch’s “Stock Trader’s Almanac” which has been published annually in November for the last six decades.  The almanac is full of historical market data observations that can be helpful in providing strategy ideas and unique perspectives on potentially repeatable market patterns.  According to the Hirschs’ research on the last 46 administrations since 1833, the second half of the election term produced a total net market gain of 742.5% versus the 326.6% gain of the first two years of these administrations (NOTE: the charts below do not include Trump’s Pre-Election and Election years, 2019 and 2020):

Wall Street Journal’s Paul Vigna on Friday took it a step further by looking at the S&P 500 since 1929, providing stats on which party produces greater returns.  His primary takeaway?  “Stocks tend to go up regardless of which party controls Washington”.  From single-party control of both Congress and the presidency to a split government, S&P 500 performance has been, on average, very similar (7.45% and 7.26% respectively).

The bottom line: we continue to rely on our optimized models and rules-based logic rather than emotion and political bias.  As you can see from the data, the build-up and outcome of the upcoming election in retrospect will likely lend itself more to theatrics (and timing and cycles) rather than elephants and donkeys.  The above charts and the YTD 2020 market performance, again remind us that anything is possible in any given year with the market.

Forte Strategy Update

We executed 7 trades last week for a net loss of 2.1% compared to a loss of 0.5% by the S&P 500. Our YTD net results equal a 1.4% gain compared to a 7.2% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the general market.   The account correlation to the SP500 remains low at 0.154.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

Election Fever

With only 11 trading days remaining before November 3, we’d be remiss if we didn’t mention at least something about the upcoming election and the potential impact on the markets. Regardless of your preference toward one side of the aisle versus the other, many agree that more volatility is likely over the coming two weeks (for example, both Robinhood and Interactive Brokers have recently sent client notices indicating higher margin requirements due to anticipated increased volatility). Can we be so sure? Let’s take a look at the last four presidential election periods for possible precedents.

To make sense of all of the arrows and stars and colors (oh my!), allow us to explain. Each of the five individual daily charts above display the two months preceding and the two months following the respective election dates (2004, 2008, 2012, 2016 and 2020) with the S&P 500 (ES=CME E-Mini S&P 500 futures contract) graphed on the top and the volatility index (VX=CBOE volatility/VIX futures contract) shown on the bottom. The mid-October date (relative to today) is identified with the white arrow and the election dates are plotted with gold stars. As you can see, all five charts saw a gradual decline in the S&P 500 as we approached the election date (although we’ve seen an upward move over the last few weeks) with four out of five experiencing declining volatility (the ’08 market meltdown being the exception). Then all four of the last elections periods saw a multi-week bullish move in the markets following the actual election date. Political uncertainty mitigated (regardless of the winning party)? Santa Claus rally? For position traders like us, this is very interesting. Nonetheless, we’ll continue to follow the outputs from our trading models for specific decisions.

Forte Strategy Update

We executed 3 trades last week for a net loss of 0.5% compared to a gain of 0.2% by the S&P 500. Our YTD net results so far equal a 3.6% gain compared to a 7.8% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the S&P 500.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

Potential New Perspective

We both listened to The Systematic Investor podcast last week hosted by Niels Kasstrup-Larsen in Switzerland and hit the reverse-replay button a few times to make sure we understood what was said.  He shared some recently completed analysis comparing the long-term returns of the S&P 500 from November 1984 through August 2020 versus his performance using a mechanical trend-following system over a wide-range of markets which provides returns uncorrelated to the S&P 500.

A $1,000 investment in the buy-and-hold S&P 500 strategy would have grown to $48,000 during this 36-year period while using a mechanical trending system (he was likely referencing either his own track record or that of Dunn Capital), it would have grown to $68,000.  

However, the hard-to-believe part was that he went on to say that if you had allocated the capital 50% to the S&P 500 buy-and-hold strategy and 50% to the mechanical trending system and rebalanced monthly, the amount grew to $102,000 – so the mixed allocation strategy improved results by 30-50% for both strategies.  If proven in our applications, this seems like a simple way to significantly improve returns.

While neither of us have used a buy-and-hold or fundamental stock-picking strategy for our investment allocations, we will have to pause and consider adding that dimension to our work as part of an investment portfolio. We also acknowledge that as accounts become significantly larger, the more frequent trading we currently use has limitations due to slippage, impacts from the current bid/ask price spread, etc. So, a strategy with a longer-term horizon and lower trading frequency may also makes sense.

Forte Strategy Update

We executed 8 trades last week for a net loss of 1.7% compared to a gain of 3.8% by the S&P 500. Our YTD net results equal a 4.1% gain compared to a 7.6% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the general market. The account correlation to the SP500 remains low at 0.154. More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

The Best and Worst Days

As covered a couple of weeks ago, we frequently assess the robustness of a trading model by comparing out-of-sample data to expected in-sample results.  Two weeks ago, we retrieved analysis prepared for a presentation made to a medium-sized hedge fund in Chicago in September 2014 to see if the negative Friday’s pattern was still as consistent as it was during the 2000-14 study period – which it was.  We’re pulling from the same deck this week to see if the “Best and Worst” days pattern defined in May 2014 may still be in play.

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Here’s the table from 2014 showing the sum of the DJ30 gains from January 2000 through August 2014 based on the trading day of the month (the numerical sequence of the days the market was open during the month regardless of the calendar date).  It shows a defined pattern of gains during the first and middle of the month and 3-5 day period of weakness starting just after the 2nd half of the month.  The notes on the bottom show that a strategy that went long on the green highlighted days and short on the orange days would have had a sum gain of 182% over the 14-year period versus 72.3% for the buy and hold strategy.  This is a 2.5X difference (please note that these are simple sum numbers for the purposes of comparison with no attempt to quantify the compounding effects during the 14 years which would further amplify the results).

So how would have this strategy worked during our most recent out-of-sample data set, September 2020?  This simple best 9 days, worst 3 days strategy as outlined in 2014 would have generated a 3.5% gain versus a 2.4% loss for the SP500 in September.  The strategy is easily executed by buying the DIA ETF at the close of the prior day and then replacing this position with the DOG ETF at the close on the 12th trading day of the month.  We’ll provide a longer-term update of this strategy within a few months to see how it performed over multiple years since September 2014.

Forte Strategy Update

We executed one trade last week for a net gain of 1.1% compared to a gain of 1.5% by the S&P 500.  Our YTD net results equal a 5.9% gain compared to a 3.6% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% versus 33.9% for the general market. 

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.