Opinion: For investors who sold in May and went away, stay away a little longer
The odds are good that October will produce underperformance
CHAPEL HILL, N.C. (MarketWatch) — Don't give up on the Halloween Indicator.
I'm referring to the stock market's seasonal pattern that's also known as "sell in May and go away." Those of you who followed that advice by going to cash on May Day are probably regretting your decision, since you have missed out on the S&P 500 Index's 4%-plus increase since then.
You might even be itching to get back into the stock market now rather than waiting patiently in cash for the full six months to expire.
Don't be too quick to jump the gun.
That's because, even though October, on average, is not as terrible a month as September, it has been even more volatile in the past — the most volatile of the entire calendar, in fact. And odds are good that October's low will be lower than where the stock market stands at the end of September. (See chart at the top of this column.)
Maybe even a lot lower: There is a one-in-four chance that October's low will be more than 5% below its Sept. 30 level.
In other words, there are good reasons why October is grouped with the other post-May months in which it can be wise to stay in the comfort of cash.
To be sure, some traders will look at the same historical data that I have for this column and try to jump back into stocks at October's low rather than wait until the last of the trick-or-treaters have gone to bed. In theory, of course, that could work, since the market typically does recover from its intra-month October low to where it stands on Halloween.
In practice, however, this has been easier said than done. I say that because of the track record of an investment newsletter that over the past decade has recommended a modified Halloween Indicator that attempts to pick better October re-entry points than Halloween (and better exit points than May Day). This letter is the Almanac Investor Newsletter, edited by Jeffrey Hirsch.
According to calculations from the Hulbert Financial Digest, Hirsch's attempt to outsmart the mechanical version of the Halloween Indicator has improved returns only modestly — by only 0.3 percentage point a year since 2002 — while also incurring slightly more volatility, or risk. On a risk-adjusted basis, Hirsch's modification has merely equaled the return of the original Halloween Indicator.
(For the record, I should point out that the Hulbert Financial Digest used to track another newsletter's modification of the Halloween Indicator — from Sy Harding's Street Smart Report. While it performed better than Hirsch's service, adding an annualized average of 1.3 percentage points per year since 2002 to the mechanical version of the indicator, Harding passed away in 2015 and his newsletter no longer is published.)
The bottom line? Don't get seduced into complacency just because the stock market has beaten the poor seasonal odds that have been in place since last May Day. The "sell in May and go away" period still has one more month to go!
Posted by: sarah_oz@yahoo.com
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