Sarah / Dave,
I back tested Aug – Oct extensively in development of a seasonally-modified strategy and TSP seasonal almanacs. You are correct about the weak performance during the summer especially for the TSP S fund and Sarah is correct about the end of year strength. But like all analysis it has caveats. From 1950-2000, July was a strong month on average after a weak May and June period. Since 2000, the unfavorable summer/fall months have been worse and avoiding May through late October yielded even better results.
The TSP S fund show stronger seasonal tendencies than the TSP C fund since it is more volatile. It has worse performance than the C fund during the unfavorable months, but better performance than the C fund during the favorable months. In other words, it is more important to avoid the S fund during August – October when other measures of market risk are elevated as they are now.
There are many more caveats and seasonal analysis should be combined with other cyclical market risk measures in the future. Case in point, both market internals and measures of risk aversion have been rising for several months warning of a much higher risk of deeper correction like in 2011. This alone indicates reduced exposure to equities, but combine this with the unfavorable months then very low exposure is a must. Re-enter when seasonal, technical and cyclical measures signal lower risk.
Michael
Posted by: michaelhbond@yahoo.com
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