Background

Examples of such calendar periods are: the handful of days surrounding the turn of most months, the few days before most market holidays, the week between Christmas and New Years, and the period roughly between Halloween and Easter.

Numerous Academic Studies Confirm Calendar Effects

It is prudent to be cautious about any investing strategy, let alone one that is as far out of the mainstream as Calendar Effects.

Fortunately, there have been numerous studies over the years by skeptical academics who have concluded - usually to their surprise - that Calendar Effects are real, statistically significant, and have persisted over many decades (even centuries).

Here are some quotes:

"In this paper, we construct a powerful test to evaluate the significance of calendar effects. We apply the test to stock returns from ten countries and find overwhelming evidence that calendar effects are statistically significant, even if one controls for the possibility of data mining."

- from "Testing the Significance of Calendar Effects", Professors Hansen and Lunde, Brown University Dept. of Economics, January 2003 (emphasis added)

"Thus, over the period [1926-2005], the turn-of-the-month effect is pronounced and, as we will show, highly statistically significant...The turn-of-the-month effect occurs in 30 of them [of 34 non-US countries studied]. The effect is apparently not due to a factor unique to the US market structure."

- from "Equity Returns at the Turn of the Month", Professors Xu and McConnell, Purdue University, July 2006 (emphasis added)

Other academics have looked at historical data and determined Calendar Effects to have been noticeable in European markets since 1694!

Even Professor Jeremy Siegel, the pre-eminent academic proponent of efficient markets and buy-and-hold investing, acknowledges that Calendar Effects (he calls them Calendar Anomalies) are very real. In fact, he devotes a chapter to them in his famous "Stocks for the Long Run." He grudgingly concludes "Why these anomalies occur is not well understood, and whether they will continue to be significant in the future is an open question. But their discovery has put economists on the spot. No longer can researchers be so certain that the stock market is thoroughly unpredictable and impossible to beat."

- from "Stocks for the Long Run", 4th Edition, Prof. Jeremy Siegel, Chapter 18, p. 306 (emphasis added)

My Involvement with Calendar Effects

Using the Sherman Calendar Effects Strategy

The Calendar Effects strategy is an extremely conservative method of gaining equity exposure, as it only enters the market for a relative handful of days at a time, then exits back to the safety of cash until the next Calendar Effects period arrives. In a typical year, there are twelve to fourteen trades, totaling just 72 to 77 market days (out of 252 market days in an average year).

In Bull Market years, when the market is steadily advancing, the Calendar Effects strategy typically produces positive returns but can fall somewhat behind the market averages, particularly in strongly positive years.

In Bear Market years, Calendar Effects tends to produce positive returns and usually greatly outperforms the market averages. For example, my Calendar Effects managed accounts were up more than 27% in 2008 while the S&P 500 was down over 38% (an astounding outperformace of 6,500 basis points!), and they have continued to significantly outperform the S&P 500 through the second quarter of 2009 (see the Historical Data table below).

Because of the dichotomy of bull-market underperformance and eye-popping bear-market outperformance, I usually recommend that advisors apply my Calendar Effects strategy during Bear Markets, and apply my other Sherman Sheet strategies during Bull Markets. Fortunately, the Sherman Sheet conveniently points out when we are in a Bull Market or Bear Market, so making the switch is very easy.

The Two Pieces of Information You Need to Know

The Sherman Sheet publishes the only two pieces of information that are required to implement the Sherman Calendar Effects Strategy: the entry and exit dates of the next Calendar Effects period, and the recommendation of styleboxes that should be used for investment selection during the next Calendar Effects period. The dates are published well in advance, whereas the stylebox recommendations are published on the entry date, since they are based on current information and subject to change right up to the day before the entry date.

The Upside of the Sherman Calendar Effects Strategy

The upside is simple: proven outperformance, particularly in difficult markets, with minimal exposure to market risk.

The Downside of the Sherman Calendar Effects Strategy

The biggest downside is that clients can become impatient should the Calendar Effects Strategy underperform in Bull Market years unless they are very conservative and well-prepared by their advisors. My recommendation for overcoming this fact of life is to apply the Sherman Calendar Effects Strategy during Bear Markets, and apply other Sherman Sheet strategies during Bull Markets.

Another downside is that the Sherman Calendar Effects Strategy can only be implemented in accounts that allow for twelve to fourteen round-trips per year, with holding times that can be as short as two or three days. Many 401k plans and mutual fund families simply don't allow this kind of activity. The ProFunds and Rydex fund families are perfect, as are regular brokerage accounts with ETF access (especially in wrap accounts where transaction fees are not an issue). You should check to be sure that any accounts you are considering for the Sherman Calendar Effects Strategy are not prevented from engaging in this level of activity!

Historical Data: Calendar Effects Model Portfolio