Weekly Commentary: Is the ‘Halloween Indicator’ a Trick or a Treat?

October 26, 2018

October 2018

Weekly Commentary October 26, 2018

Is the ‘Halloween Indicator’ a Trick or a Treat?
By Tim Courtney, Chief Investment Officer

In the past, we’ve talked about market indicators with foreboding names like the Hindenburg Omen,1 and Death Cross.2 We’ve also discussed the memorable motto, “Sell in May and Go Away,” whose proponents encourage investors to abandon the equity market from May to November to avoid seasonal volatility.3

With October coming to an end, we thought it would be a good time to address the aptly named “Halloween Indicator.”4 Basically a corollary to “Sell in May and Go Away,” it advocates getting back into the market now because the six months from November to April have produced higher returns historically.

Looking at the returns by month you do find that the months from November through April have indeed seen higher returns than the other six months.5 However, it is not at all clear that investing only in these months and avoiding the others makes sense. Consider these factors:

1. Returns in the “bad” part of the year are still historically positive. Our research indicates that if the market typically gains about 10 percent per year, then an average of 7 or 8 percent of that comes between November and April, while 2 or 3 percent is generated between May and October. While the winter months tend to be stronger, the summer months still offer positive returns. Sitting out of the market during the “bad” times would mean leaving returns on the table and, more importantly, missing out on the compounding effect of those returns.

2. Many market indicators aren’t particularly accurate. While market indicators prove to be correct some of the time, this is not always the case. The past five years represent a good example because many of these indicators have activated, warning investors to stay on the sidelines. However, if they did, they would have missed out on double-digit returns.5

3. Repeatedly trading in and out of the market can trigger significant taxes and fees. All other things being equal, we have a bias toward making fewer trades because of what we call “frictions” in the market. Essentially, these are the costs that erode your gains over time through trading fees and taxes. Even worse, if you trade multiple times per year, you become subject to short-term capital gains that are taxed just like wage/interest income.

In lieu of market indicators, at Exencial, we prefer to focus on pricing as the best gauge of future performance. Assets that are priced very high tend to have lower expected returns moving forward, while lower-priced assets often have higher expected returns over time. Think back to 2008, for example, when U.S. markets were priced very inexpensively and ultimately performed very well over the next 10 years. 5

How’s that for a Halloween treat?


1. Investopedia – Hindenburg Omen
2. Investopedia – Death Cross
3. Investopedia – Sell in May and go away
4. Investopedia – Halloween strategy
5. Yahoo! Finance – S&P 500

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

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