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Home MarkHulbert

Timing system gone, not forgotten

By Mark Hulbert
Published: Jan 8, 2003 12:02 a.m. ET

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17,850

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Dow Jones Industrial Average

17,900

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ANNANDALE, Va. (CBS.MW) -- First the bad news. The stock market timing system followed by the Hulbert Financial Digest with
the best 20-year record is no longer published.
Now the good news: It doesn't matter -- you can profit from it anyway. It is an entirely mechanical timing model, based on three
simple rules. With knowledge of those three rules, it is possible to specify in advance when buy and sell signals will occur -months, or even years, before hand.
I am referring to the so-called Seasonality Timing System. And I'm going to tell you what these three rules are in a moment.
But first I want to review the history of this remarkable timing system.
Its origin in the investment newsletter arena can be traced back to Market Logic in the mid-1970s. Norman Fosback, one of that
newsletter's editors, had come up with this Seasonality Timing System while conducting research for his book "Stock Market
Logic." Fosback devoted a chapter of that book to this timing model, and he regularly reported on it in the newsletter.
The model proceeded to have the best long-term risk-adjusted return of any the Hulbert Financial Digest has followed.
Consider the performance of a hypothetical portfolio that switched between the Wilshire 5000 index and 90-day T-Bills on this
timing system's signals. Over the 20 years ending this past Dec. 31, this portfolio gained 13.5 percent annualized, in contrast to
12.3 percent for buying and holding.
But what is really impressive is that this hypothetical portfolio was 45 percent less volatile, or risky, than the overall market. In
other words, this timing model outperformed the market by more than a percentage point per year with little more than half
the risk.
To be sure, this timing system is not for everyone. It trades frequently, for example -- about 17 round trips per year, in fact. So
it should be employed in a tax-free or tax-deferred portfolio, and only with investment vehicles for which there are no
transaction costs (such as no-load funds that levy no penalties for short holding periods).
In the late 1990s, Time Warner AOL (now AOL Time Warner) bought Market Logic and folded into Mutual Funds Magazine.
While this monthly magazine continued - episodically -- to report on the Seasonality Timing System, AOL discontinued the
magazine altogether this past Fall.
As a result, as far as I can tell, the Seasonality Timing System no longer is published. To be sure, Fosback started another
newsletter of his own in March 2002, Fosback's Fund Forecaster, and in it Fosback does recommend several different
"Seasonality Model Portfolios." However, the seasonality model that Fosback employs appears to be significantly different from
the one he originally recommended in Market Logic.
If you can find a newsletter that publishes Fosback's original seasonality timing system, I recommend that you subscribe to it if
you want to follow that timing system. No doubt its editor can do a much better job of explaining that system and its rationale
than can I.
However, since AOL Time Warner seems to have abandoned the publication of this information, what follows is my effort to
make the information available until such time as some publication gets back into the business of providing this information to
investors. I'm doing this primarily at the request of investors who are interested in the system -- and in the hope that its regular
publication will be resumed and make my efforts unnecessary.
What follows are the three rules that make up the Seasonality Timing System. I retrieved them from the May 2001 issue of
Mutual Funds Magazine, the last time I saw the magazine provide a full-scale review of this timing model.

The first two rules outline the two types of seasonality that the system hopes to exploit, while the third deals with exceptions:
To exploit positive seasonality around the turns of each month: Buy at the close of the third-to-last trading of each month,
and sell at the close of the fifth trading session of the following month.
To exploit positive pre-holiday seasonality: Buy at the close of the third-to-last trading day prior to exchange holidays, and
sell at the close of the last trading day before a holiday.
Exceptions: If the holiday falls on a Thursday, sell at Friday's close rather than Wednesday's. Also, if the last day before a
holiday is the first trading day of the week, don't sell until the day after the holiday. Finally, never sell on the first trading day
after options expire; instead wait an extra day.
Following these rules, the Seasonality Timing System became invested in stocks as of the close of the market this past Dec. 27
(the third to last trading day of December) and will get out at the close of the market on Wednesday, Jan. 8 (the fifth trading
session of January). Through the close of Jan. 7, the Dow Jones Industrial Average DJIA, +0.26% has risen by more than 5
percent over this period.
Those following this timing model are now in cash. They will next be in the market between the close of Wednesday, Jan. 15,
through the close of Friday, Jan. 17, immediately prior to the exchange holiday for Martin Luther King day on Jan. 20.
Stay tuned. I will continue to monitor this model and report on its performance.
For more information or to subscribe to the Hulbert Financial Digest, click here.

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