Opinion: Those who sold in May are looking to return to stock market
Followers of the Halloween Indicator will time their move back into the market
Even while much of Wall Street obsesses about a possible bear market and when to get out of the stock market, one group of investors is poised to get back in.
I am referring to followers of the so-called Halloween Indicator, which is based on the historical tendency for the stock market to produce almost all of its net returns between Halloween and the May Day six months later. Adherents therefore "Sell In May and Go Away" for six months, safely parked in cash until reinvesting it the subsequent Halloween.
This Indicator has worked like a charm this year, of course. The Dow Jones Industrial Average DJIA, +1.23% is 10% lower than where it was last May Day, which means that followers of the Halloween Indicator this year are that much ahead of a buy-and-hold strategy for doing nothing more difficult than go to cash when the calendar turned from April to May.
That's remarkable, since most market-timing strategies don't even equal the market's return, much less beat it. And among those that do come out ahead, most do so by only a couple of percentage points.
Though "Selling In May and Going Away" doesn't always work out as well as it did this year, it has done so far more often than not. One academic study, for example, found statistically significant evidence of this pattern's existence in the histories of the more than 100 countries around the world that have stock markets. In the case of the United Kingdom, that meant the study analyzed data back to 1694.
This impressive history might very well convince you to follow this indicator mechanically, which would mean waiting until the last trading day of this month before re-investing the cash raised in the spring. Two advisers I track have been unwilling to leave well enough alone, however, and over the last decade have created timing systems that attempt to pick better re-entry points than Halloween (and better exit points than May Day).
The first of these two advisers is Jeffrey Hirsch, editor of the Almanac Investor Newsletter, and the other was the late Sy Harding, editor of Sy Harding's Street Smart Report. (Harding passed away this past May.) Both of the modified Halloween Indicators that these advisers developed rely on a technical indicator known as MACD to pinpoint the precise day on which to enter stocks in the fall and exit in the spring. (MACD is a short-term momentum indicator, standing for moving average convergence divergence.)
The Hulbert Financial Digest has track records for both market timers' modifications of this seasonal pattern dating back to mid-2002, nearly 13 years ago. The HFD calculates their returns on the assumption that, when they are invested in stocks, they earn the return of the Wilshire 5000 Index W5000, +1.47% ; otherwise they are assumed to be invested in 90-day Treasury bills TMUBMUSD03M, +159.84% .
| Annualized return mid-2002 to 9/30/2015 | Risk level (100 = market) | Sharpe Ratio | |
| Buying & holding | 7.2% | 100 | 0.13 |
| Mechnically selling every 4/30 and buying every 10/31 | 7.4% | 61.9 | 0.20 |
| Sy Harding's modification of "Sell in May and go away" | 8.8% | 61.0 | 0.24 |
| Almanac Investor's modification of "Sell in May and go away" | 7.7% | 63.9 | 0.20 |
As you can see from the accompanying table, a buy-and-hold strategy since mid-2002 has produced a 7.2% annualized return. Mechanically going to cash every May Day and re-entering the market on Halloween would have done slightly better with a lot less risk — which is why it comes out well ahead of buying and holding on a risk-adjusted basis (as indicated by a higher Sharpe Ratio).
Harding's modification of the Halloween Indicator did even better still, producing an 8.8% annualized return over the same period — 1.6 percentage points per year more than a purely mechanical application of this seasonal pattern, and 1.4 percentage points ahead of a buy-and-hold. Even better, this market-beating return was produced with 39% less risk, which means it's even further ahead of a buy-and-hold on a risk-adjusted basis.
While the Almanac Investor's modification of the Halloween Indicator performed less well than Harding's, producing a 7.4% annualized return while incurring 36% less risk than the market itself, it still came out ahead of buying and holding, however, on both an unadjusted and a risk-adjusted basis. And, on an unadjusted basis, it did better than the mechanical version of the Halloween Indicator.
What about this coming October? Because no one in Harding's organization took over upon his passing, there's no way of knowing when in coming sessions he would have recommended getting back into the stock market. In past years, however, his preferred re-entry date was on Oct. 16, and only then if MACD was on a buy signal. If it was not, he would delay re-entry until it was.
Hirsch, in contrast, is willing to trigger a re-entry as early as the beginning of October, if the MACD is on a buy signal. That's not yet the case, given the market's recent weakness, including a Dow decline on the first trading day of October. But stay tuned: A sharp rally for more than a day or two could very well persuade Hirsch to flash a buy signal.
Posted by: sarah_oz@yahoo.com
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