Monday, April 2, 2012

Baby's Got Sauce... Checking in on the World's Greatest Rotation Strategy

Definitely not the world's best strategy, but I thought I'd try out a headline grabber. In fact, there is no legit reason I can think of that explains why this seasonal pattern should outperform going forward, BUT the results (both in and out of sample) are good enough that I won't be ignoring them.

I planned to provide an update on the "Secret Sauce" allocation strategy as soon as I started seeing all the "sell in may, go away" articles that always come this time of year. I didn't have to wait long.

To Marketwatch:
Those interested in doing some spring cleaning in their portfolios this month might be tempted to do the most radical spring cleaning of all: Sell everything and go to cash.

That’s because April represents the end of the seasonally favorable six-month period that began last Halloween, and the fast approach of the time when many will “Sell in May and Go Away.”
Which brings me to the Secret Sauce, amazingly now in its 5th year of in sample testing.

What is the Secret Sauce?

An alternative to the "sell in May, go away" strategy, Secret Sauce is sell the S&P 500 in May and then invest in the Long Government / Credit bond index (rather than sit in cash). The "strategy" takes advantage of data mining that showed the Long Government / Credit index outperformed the equity market for the May through October time frame over the 34 years between 1974 and 2008.

The amazing thing is that since I first revealed the Secret Sauce back in July 2008, the results keep getting better. The massive outperformance since 1974 (14.7% vs 10.6% annualized returns) with lower volatility (12.4% vs 15.8% monthly standard deviation) was met by even larger outperformance over the past few years (35.6% vs 8.5% returns over the last 12 months, 11% vs 2% annualized over the last five) resulting in $1 invested in the Secret Sauce in January 1974 now being worth $188 vs. $1 in the S&P 500 being worth $47.5 (assuming no fees, transaction costs, or taxes).

And the strategy's theme song... G Love & Special Sauce with 'Baby's Got Sauce'

Source: S&P / Barclays Capital


  1. seems simple enough. do i understand this correctly . . buy SPY on Nov 1, sell SPY/buy BLV on May 1?

  2. Is BLV a good idea or TLT better?

    I just looked at last three years and TLT/BLV does seem to outperform the SPY from April through October.

    You interpret macroeconomic data very well.:)

  3. TLT is much more sensitive to interest rates (i.e. it has more duration and no credit) while BLV is currently higher yielding and will typically be less volatile. I don't recommend anyone put 100% of their assets into either.