Alpha Power Investing Newsletter

November 1, 2019

The Dawn of a New "Power Zone"

November 1st of each year marks the beginning of a new "Power Zone." For our flagship "all-weather" Alpha Mid-Cap Power Index Managed Account strategy, this period extends from November 1st each year through May 31st of the following year. During this period the strategy holds the S&P MidCap 400 Index. Historical results suggest that this is one of the most consistent plays an investor can make.

The Value of Consistency
The Alpha Mid-Cap Power Index strategy is designed to make money across each full market cycle - i.e., from bear market low to bear market low and from bull market high to bull market high. Within each cycle the goal is to achieve steady incremental returns without suffering the severe declines often experienced by buy-and-hold investors. There are two primary benefits associated with achieving consistent returns beyond just the growth of capital. Steady returns:

  1. allow an investor to sleep at night, and;
  2. make it psychologically easier for an investor to adhere to their strategy - which increases their odds of long-term success.

To highlight the consistency of the S&P MidCap 400 Index during the Power Zone, consider the annual results highlighted in Figure 1. This table shows the yearly cumulative total return achieved by holding the S&P MidCap 400 Index from November 1 through May 31 for each of the past 38 years.

Figure 2 presents a quick summary of the 38 years of results presented in Figure 1.

Let's address what these numbers mean in terms of real-world investing:

  • First off, it is important to remember that well-worn, but highly applicable phrase - past performance is no guarantee of futures results.
  • With that caveat in mind, it is a very rare thing to find a repeatable market trend that shows profitable results almost 90% of the time.
  • The average seven-month Power Zone gain was +12.9%. It should be noted that this average was NOT the result of a few big years that happened to inflate the average. This is evidenced by the fact that the median seven-month gain is actually slightly higher at +13.1%.
  • Despite these positive results, investors should also recognize that a losing Power Zone period is always a possibility and that in the 1983-1984 period the index lost fully -9.3%. An investor in the strategy must be prepared to accept an occasional decline in equity as a cost of doing business.

An investor concerned about a decline by the S&P MidCap 400 Index during the Power Zone would be well served to consider the results displayed in Figure 3. Figure 3 displays the cumulative Power Zone returns for the S&P MidCap 400 Index over rolling three-year periods.

The most important thing to recognize in Figure 3 is that the 36 rolling three-year returns showed a gain 100% of the time. What this tells an investor is that patience pays off. Even if one year does not see a Power Zone gain, historically if one sticks with it over time, gains accumulate.

There are other reasons to be patient when it comes to holding mid-cap stocks during the Power Zone. From November 1, 1981 through May 31, 2019 during the Power Zone, the S&P MidCap 400 Index:

  • Gained +8,260% versus +2,881% for the S&P 500 Index (or 2.87 times as much).
  • Showed a positive three-year rolling return 36 out of 36 times (100% of the time) versus 32 out of 36 times (88.9% of the time) for the S&P 500 Index.
  • Outperformed the S&P 500 Index 25 out of 38 times (66% of the time) on an annual basis and 28 out of 36 times on a three-year rolling return basis (78% of the time).

These are the kinds of consistent, market-beating performance results that most investors never achieve.

Nothing is ever guaranteed in the financial markets. Still, the key to long-term investment success is to put the odds as much in one's favor as possible on a regular and recurring basis. Few factors that we have researched have shown results as consistent as holding mid-cap stocks during the months of November through May. With that thought in mind, it is also important to remember that each new "Power Zone" period represents its own "roll of the dice", and that whatever gain or loss accumulates over the next seven calendar months, the long-term viability of the S&P MidCap 400 "Power Zone" is an "all- weather edge" that investors are wise to take advantage of.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and are not representative of the returns the Alpha Mid-Cap Power Index Managed Account strategy. The data does not include management fees or the cost of funds, trading, or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on the S&P MidCap 400 Index. Indexes are not investment vehicles and persons cannot invest directly in an index. Index funds/ETFs may vary somewhat from index returns due to management fees and portfolio structure. The S&P MidCap 400 Index is a market-weighted index of 400 mid-sized companies with total market capitalizations from roughly $750 million to $3 billion dollars. Stocks in this index represent companies from industries including information technology, energy, health care, financial, manufacturing, etc. The data used to construct the illustrations was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.

The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security. Before investing in any fund and/or strategy, investors should consider the investment objectives, risks, charges and expenses of the fund/strategy and its investment options.

Alpha Investment Management, Inc. is a SEC registered investment advisor located in the State of Ohio. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.  

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