StockWatch

Should You Sell in April and Go Away?

By Mark Hulbert,
Editor of the Hulbert Financial Digest, a service of MarketWatch.com

Should you try to get a head start on followers of the famous Halloween Indicator and, instead of waiting until May to "sell and go away", do so in April?

There's a lot to be said for the indicator's following getting such a head start. The indicator (also known as "Sell in May and Go Away") has become, perhaps, the best-known seasonal pattern on Wall Street. Waiting until May Day to sell puts you at risk of having to exit your positions at the same time that many other investors are all trying to do to the same thing.

On the other hand, the odds of being able to improve on the Halloween Indicator would seem to be quite low. Stock market timers, in general, have very poor success rates, rarely doing better over the long term than simply buying and holding. Why would we think that they can do any better timing their entries and exits in October and April than in any other month of the year?

Well, the proof of the pudding is in the eating.

And, over the last nine years, one of the two market timing services I monitor that regularly
second-guess the "Sell in May and Go Away" system has significantly increased that seasonal pattern's performance. While the other one has not improved on the Halloween Indicator, it at least has still beaten a buy-and-hold strategy.

The mechanical version of the Halloween Indicator is already a big improvement on a buy-and-hold strategy, of course. According to a comprehensive review that appeared in the December 2002 issue of the prestigious academic journal, American Economic Review, this pattern has existed historically in 36 of 37 countries studied.

In each of those countries, average stock market returns from Halloween through May Day (the so-called "winter" months) were significantly higher than equity returns from May Day through Halloween (the "summer months").

But, not willing to leave well enough alone, two market timing services I monitor have, for a number of years, tried to second-guess the exact days on which a follower of this seasonal pattern would enter in the Fall and exit the market in the Spring. The first is the Almanac Investor Newsletter, edited by Jeffrey Hirsch, and the other is Sy Harding's Street Smart Report, edited by Sy Harding.

Both pursue surprisingly similar modifications to this basic seasonal pattern: Each relies on a technical indicator known as MACD to pinpoint the precise day on which they enter and exit the market. (MACD, of course, is a short-term momentum indicator, standing for moving average convergence-divergence.)

The Hulbert Financial Digest (HFD) has data for both market timers' modifications of the Halloween Indicator back to mid-2002, nine years ago. The HFD calculates its returns on the assumption: When they are invested in stocks, they earn the return of the Wilshire 5000 Index; otherwise, they are assumed to be invested in 90-day Treasury bills.

To put these timers' success into context, consider that, since mid-2002, a buy-and-hold has produced a 6.5 percent annualized return. A purely mechanical application of the Halloween Indicator (automatically entering the market on Halloween and exiting on May Day) would have produced a 6.3 percent annualized return. Although this 6.3 percent is below that of a buy-and-hold, it was produced with 35 percent less volatility, or risk – and, therefore, ends up beating a buy-and-hold on a risk-adjusted basis.

Now, consider the performance of Harding's modification of the Halloween Indicator: It produced an 8.2 percent return (annualized) over the same period, or 1.9 percentage points per year more than a purely mechanical application of this seasonal pattern and 1.7 percentage points ahead of a buy-and-hold.

Even better, this market-beating return was produced with 37 percent less risk, which means it's even further ahead of a buy-and-hold on a risk-adjusted basis.

In fact, Harding's modification of the Halloween Indicator is in 8th place for risk-adjusted performance since mid-2002, out of the 124 timing strategies the Hulbert Financial Digest has tracked over this period.

To be sure, Hirsch's modification of the Halloween Indicator performed less well, producing a 5.6 percent annualized return (and with 35 percent less risk than the market itself). Nevertheless, it is worth nothing that, on a risk-adjusted basis, this still beats a buy-and-hold.

What about this April? To be informed when these two advisors actually trigger their buy signals, of course, you will need to subscribe to their services.

But, one way in which their MACD-based systems are likely to trigger an early sell signal (but not the only way) is if the market is strong for a week or two and then quickly drops back.

If that happens, traders interested in taking the rest of the spring and summer off from stressing about the market may want to consider going to cash.