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Stock Market: The Halloween Indicator

   By: Larry Holmes

In the stock market, there is an old Wall Street adage to "Sell in May and go away." It refers to the market's tendency to perform much better during the six month period beginning on November 1st and ending on April 30th than during the period of the same length beginning on May 1st and ending on October 31st. It's also known as the Halloween Indicator.

According to the 2005 edition of the Stock Trader's Almanac, the six month period beginning in November gained 10,599.68 Dow Jones Industrial Average points in 54 years. The remaining six months, from the beginning of May through the end of October, lost 588.44 points. The S&P 500 index gained 1089.23 points in the November-April period and gained just 62.09 points during the May-October period.

A $10,000 investment in the Dow made in 1950 and ending in 2003 would have grown to $483,060 during the November-April period and lost $328 during the May-October period. That's the origin of the saying to "Sell in May and go away."

So, on the surface, it seems like a no-brainer. Just invest in the stock market during the best six months of the year and do something else with your money during the rest of the year. In fact, there are quite a few investment strategies based on doing just that.

However, like anything else that seems too good to be true, on closer examination it's not quite that simple. According to Mark Hulbert, editor of Market Watch, the Halloween Indicator has done much better since 1970 than during the years before.

Since 1970, the average six-month return during the November-April period is +8.39%, which on an annualized basis is more than 17%. And the return during the May-October period is -0.03%. But, before 1970, the return during the best six months is +3.62% and the return during the worse six months is +2.71% -- a statistically insignificant difference.

So what's the deal? Did something fundamentally change in 1970? It's hard to say and that's the problem. There have been attempts to explain what may have changed. According to a study done by the American Economic Review, the timing of summer vacations may have something to do with it. Before 1970, the timing and length of summer vacations was significantly different than in the last three or four decades.

Hmm… I'm not so sure about that. In fact, as far as I'm concerned it's never been adequately explained why the stock market would do better during one six month period of time than another, no matter which years you're talking about. But I know this -- an indicator that can't be explained on its merits should probably not be the basis for investing money -- no matter what the historical return.

Larry Holmes invites you to visit You will learn how to become debt-free, save and invest money, cut taxes, manage risk, and achieve financial freedom in a much shorter time than you dreamed possible.

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