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A Spooky Stock Market Indicator ?
Are Followers of the so called Halloween Indicator about to time their move back into the market soon. Let us explain below....
We talked about this in our recent ==> VIP NEWSLETTER HERE just a few days ago.
It seems that alot of the Wall Street gurus are obsessing about a possible bear market and when to get out of the stock market, however there is one group of investors poised to get back in. Those who sold in May might be looking to return to stock market. I am referring to followers of the so-called Halloween Indicator, Let us explain exacty what this is, if we do have your attention.
The Halloween indicators 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. Its sometimes known at the BEST PERFORMING time for the market, in a calendar year. It promotes the action for a trader to “Sell In May and Go Away” {or get out of the market and go to cash} for six months, safely parked in cash until reinvesting it the subsequent Halloween. {where a trader would get off the sidelines, and buy back in to the market}
This Indicator has worked like a charm this year, of course. The Dow Jones Industrial Average DJIA, +0.20% 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. So there is some respect that one needs to give this helpful statistic.
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. That is a pretty good statistic we think, as the data on our charts does not go back that far. :-)
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. But on some occasions that was either too late, or two early for the trade to take place. 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).
What you need to use in conjunction with the HALLOWEEN INDICATORS is the weekly charts and a MACD indicators 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.) MACD is one of the signals large funds and institutes use to time the market as well.
This market timer 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, did quite well. It did not win every year, but the years everything aligned it made significant profits. It is in no way a guarantee that things will turn out the same in 2015 this year.
Also when you take a look at the stock market or the S&P 500 on a weekly chart you can see that this chart would agree, with this indicator or Halloween factor. However, right now or this year in 2015 we seem to be stuck in an annoying range, which is quite violent, and neither the BULLS nor the BEARS seem to be winning.
You can see the MACD is still on a weekly SELL signal, but one thing about this which is blatenly obvious, is the the MACD is starting to really turn up hard. So that could be a warning sign for us. Eventually we are going to have to bust out of this violent range. See the chart below.....
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| SPX WEEKLY CHART |
Almanac Investor’s modification of “Sell in May and go away” a saying that is basically talks about retail and some professional investors who sell in MAY, a time on the stock market, when seasonally things start to get really bearish, or negative, and then come back around HALLOWEEN time to place fresh buys on the market.
Mechanically going to cash every May Day and re-entering the market on Halloween would have done slightly better with a lot less risk if you had done this over the last 20 years. However it does not work every year looking back. — But when you look back, if you had followed these rules you could have comes out well ahead of buying and holding on a risk-adjusted basis (as indicated by a higher Sharpe Ratio).
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? I guess, no one really knows the future. If we did, everyone would just quit their jobs and trade the stock market right!? But, there’s no way of knowing when in coming sessions the exact time of getting back into the stock market. In past years, however, a preferred re-entry date was on Oct. 16, using this so called Halloween indicator and only then if MACD was on a buy signal. If it was not, he would delay re-entry until it was. So this is an interesting element because that date is literally just a few days away. Not only that, things are starting to line up as well.
Another fact to consider is that a trigger for a re-entry can sometimes happen 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 [if that was to occur] could very well persuade a flash buy signal when you look at the charts above...
Yes, its not spooky at all really. Halloween is a time for giving, and maybe the market is about to deliver a present and make some bulls out there very happy, While at the same time....punch the bears in the guts. But OPPORTUNITIES are presenting themselves very nicely and if I had to say one thing here, even though the sell off in AUGUST swooped in fast on us, it still does not mean that the end of the BULL MARKET is here. Of course that could turn out to be a horrific call, in a few months from now, but the action we see and the range we have been stuck in for weeks now eventually has to experience a big break, either up or down, and my guess is that we are weeks away from this sort of move.
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