The “Halloween Indicator” [Investment Strategy]

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What it is – How it works?

[By Dr. Marcinko and staff reporters]

Sell in May and go away is an investment strategy for stocks based on a theory (sometimes known as the Halloween indicator) that the period from November to April inclusive has significantly stronger growth on average than the other months.

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“DANCE OF DEATH”

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The Strategy

In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween. “Sell in May” can be characterised as the belief that it is better to avoid holding stock during the summer period.

Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe. While the effect may reflect a failure of the efficient-market hypothesis, alternatives exist such as small sample size or time variation in expected stock market returns.

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Causes the Effect

Although it’s not clear what causes the effect, what’s most interesting is that it shows that stock market returns in many countries during the period May–October are systematically negative or lower than the short-term interest rate, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short-term interest rate (risk free rate).

Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show.

However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade – especially May–October 2009 – these claims are often proved wrong.

That said, between April 30 and October 30, 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55)

Academics

The effect has largely been ignored in academic circles. The idea contradicts much established theory, especially the efficient-market hypothesis.

Maberly and Pierce extended the data to April 2003. They also tested the strategy for April 1982 through April 2003 except for two months, October 1987 and August 1998. They found that it doesn’t work well in the time period April 1982–September 1987 plus November 1987–July 1998 plus September 1998–April 2003.[7] Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant.[8]

“Sell in May and go away” has persisted as a profitable market-timing strategy for stock investors, according to a follow-up study by Andrade, Chhaochharia and Fuerst (2012). They find that the Sell-in-May seasonal pattern persists after the end of Bouman and Jacobsen’s (2002) sample. This is important in showing that the Halloween effect is not a statistical fluke detected by data mining. Strikingly, in the 1998–2012 sample on average November–April returns are larger than May–October returns in all 37 markets they study. On average, the difference is equal to about 10% percentage points. Also strikingly, the magnitude of the difference is the same in Bouman and Jacobsen’s (2002) and in the out-of-sample analysis of Andrade, Chhaochharia and Fuerst (2012). Further backtesting by Mebane Faber has shown this effect has been in place since 1950.

Source: Sell in May Wikipedia, the free encyclopedia

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http://www.msn.com/en-us/money/markets/best-6-months-for-stocks-could-be-right-around-the-corner/ar-BBmma2Y?li=AA4Zjn&ocid=U348DHP

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More: 

Even More:

Much More:

Assessment

Was this indicator appropriate for 2018?

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

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Is Another [Double-Dip] Stock Market Crash Looming?

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Understanding the Hindenburg Omen [A Bearish Sell Signal or Mere Folly?]

By Dr. David Edward Marcinko MBA, CMP™

[Editor-in-Chief]

According to Wikipedia, the Hindenburg Omen is a technical analysis pattern that is said to portend a stock market crash. It is named after the Hindenburg disaster of May 6, 1937, during which the German zeppelin Hindenburg was destroyed. The Omen is said to have originated with Jim Miekka. Miekka, who was probably the foremost expert on the Omen, suggesting to his friend Kennedy Gammage that the pattern be dubbed the “Hindenburg Omen” after that ill-fated dirigible.

Historical Review

The HO rests firmly on the logic of Norman G. Fosback’s High-Low Logic Index; and indeed the HLLI is the most important component of the HO. The HLLI was developed in 1979 and published in chapter 20 of Mr. Fosback’s book “Stock Market Logic”, ISBN 0-917604-48-2. The raw value of HLLI is the lesser of the NYSE New Highs or New Lows divided by the number of NYSE Issues Traded. For daily data Mr. Fosback recommended smoothing with an 18% exponential moving average, for weekly a 5% exponential smoothing.

Source: http://en.wikipedia.org/wiki/Hindenburg_Omen

Readings:

Assessment

DJIA = 10,400 2010

DJIA = 28,992 February 2020

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Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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