Alpha Power Investing NewsletterOctober 9, 2012
Back to Equities
At the end of this month all Alpha programs, with the exception of the E-System Portfolio, will re-enter the equities market in one form or another.
Our bond program - the ALPHA Bonds Strategy - will dedicate 60% of assets to three short-term trades totaling just 20 days in the fourth quarter. These three pre-determined time periods, which we call "power periods", have been extremely profitable and consistently positive for small cap stocks since the inception of the Russell 2000 Index in 1979. They are: Power Period #1: last two trading days of October, first two trading days of November; Power Period #2: last six trading days of November, first three trading days of December; and Power Period #3: last seven trading days of December.
The chart below details the returns of all of these periods for the past 33 years.
As you can see, the success rate for these trades has been 94%, with minor losses in 2006 (-0.7%) and 1984 (-1%).
In the ALPHA Bonds Strategy, 60% of the assets are used to make these trades using the Russell 2000 Index at a beta of 1.5. This means that the trade is leveraged by 50%, resulting in 50% more gain/loss than the unleveraged period. Over 33 years, this policy has resulted in an average return of 9.6% for the fourth quarter, with market exposure totaling just 8% of all available trading days each year.
Given these facts, my view is that it is a bet that just has to be taken. After all, every two-year period since 1979 has resulted in a profit.
This remarkable consistency is the effect of the annual forecasting cycle which creates a return premium for small/mid-cap stocks at year-end. Toward year-end, market forecasters and earnings analysts look out to the next calendar year and announce their predictions. Almost always, these predications are too optimistic. Nevertheless, traders buy into the game which favors small-cap stocks, because in bull markets these stocks tend to do best. In addition, the market has a known statistical tendency to do better around month-end and during holiday periods. The three power period trades take advantage of these positive forces.
While the long-term outlook for both stocks and bonds is for below-average returns, this phenomenon has delivered superior returns in both bull and bear markets. The tendency of bear markets to hit major lows in late-summer/early-fall helps this strategy succeed. The Alpha Seasonal Strategy and the Alpha Mid-Cap Power Index Managed Account programs also take advantage of this little-known end-of-the-year jackpot.
Sincerely,1-877-229-9400, Ext. 11
Jerry Minton, Ph.D.
Past performance is not a guarantee of future performance.
© 2012 Alpha Investment Management, Inc.