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The Sherman Calendar Effects Strategy

Background

"Calendar Effects" is the name given by academics and researchers to the long-established and statistically-validated tendencies of the stock market to produce much higher than average returns during certain calendar periods.

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

I first learned about Calendar Effects back in the '70's, hidden in a chapter of a fabulous book titled "Stock Market Logic", by Norman Fosback (long out of print, but if you can find one, I heartily recommend it).

Over the subsequent years, I have continued to research Calendar Effects and to enhance the implementation strategies that can take advantage of Calendar Effects. For example, I have incorporated several other factors that adapt Calendar Effects specifically to the US market's idiosyncrasies, ranging from corporate and personal taxation dates to the timing of Jewish religious holidays.

Since 2001, I have directly managed as much as $600 million in managed accounts using this strategy. As of this writing, these accounts have been nicely profitable and have soundly beaten the S&P 500 over every trailing time frame, all while being exposed to the market a mere 28% of the time.

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

Historic Data: The Calendar Effects Model Portfolio

LEGAL & DISCLAIMER:

The Sherman Sheet financial research newsletter and web site, hereinafter referred to as "The Sherman Sheet", are published by W.E. Sherman & Co. LLC, 2 CityPlace Drive, Suite 200, St. Louis, MO 63141.

The Sherman Sheet is intended for educational and informational use by licensed financial professionals only. It is not for client or general public use. The Sherman Sheet is not intended as investment advice, nor as an offer or solicitation of an offer to sell or buy any security, nor as an endorsement, recommendation or sponsorship of any company, security or fund. The Sherman Sheet, its publisher and the publisher's employees and affiliates have no fiduciary relationship with subscribers to The Sherman Sheet or with the clients of those subscribers.

W.E. Sherman & Co. is not a Registered Investment Advisor (RIA) and has no direct client accounts. Historical returns data has been compiled using price data provided by exchanges and not from actual accounts, and should therefore be considered to be hypothetical. Historical returns data is generated by applying the current models to the published historical timeframes using exchange-provided price data and may differ from historical returns data published using previous versions of the models.

The Sherman Sheet is provided "as is" without warranty of any kind. W.E. Sherman and Co. LLC, its affiliates and employees are not liable for its usefulness, timeliness, accuracy or suitability, and we specifically disclaim all other warranties, expressed or implied, including but not limited to implied warranties or fitness for any particular purpose. In addition, no representation or warranty, expressed or implied is made as to the effectiveness of its research or investment models or to its accuracy, completeness or correctness, and we assume no responsibility for typographical errors, inaccuracies or other errors which may occur. The user assumes all risk, and neither W.E. Sherman & Co. LLC, nor any of its affiliates or employees shall have any liability for any loss sustained by anyone who has used the information contained in The Sherman Sheet or associated publications and communications.

The Sherman Sheet is confidential to subscribers only. Its unauthorized use, release, reproduction or redistribution, in whole or in part, by photocopying, email, entry into a data retrieval system, or by any other means is strictly prohibited.

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