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Mark Hulbert
April 1, 2011, 12:01 a.m. EDT
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"¹ Previous Column
The market's first quarter, by the numbers
First Take "º
All-clear signal from the Dow Theory?
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” 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 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 runs the risk of trying to exit your positions at the same time that a large number of other investors are all trying to do to the same thing.
/quotes/comstock/10w!i:dji/delayed DJIA 12,393, +72.89, +0.59%
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 that 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 autumn 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 has data for both market timers' modifications of the Halloween Indicator back to mid-2002, nine 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 14,101, -12.77, -0.09%) ; 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% 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% annualized return. Though this 6.3% is below that of a buy-and-hold, it was produced with 35% 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% 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% 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% annualized return (and with 35% 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 advisers 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.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Add Comment › · Recommend (4) · Post: Alert Email Print More Mark Hulbert March 31, 2011 The market's first quarter, by the numbers March 29, 2011 Gold market optimism at worrisome levels March 23, 2011 How corporate insiders reacted to Japan March 22, 2011 Market now higher than before earthquake March 21, 2011 How bull market stacks up against history Explore related topics Dow Jones Industrial Average Ws5000 TMI FC Comments Screener About Mark HulbertMark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
First Take All-clear signal from the Dow Theory?Is the third time a charm?
11:10 a.m. Today11:10 a.m. April 1, 2011
Most Popular Most readMost commented Should you sell in April and go away? All-clear signal from the Dow Theory? India goes wild after cricket win over Pakistan Five retirement-plan tax mistakes to avoid Payrolls climb to 216,000, jobless rate 8.8% The best laid plans ... Payrolls climb to 216,000, jobless rate 8.8% In victory, tea party can taste only ashes All-clear signal from the Dow Theory? U.S. stocks extend winning streak to third quarter Find a Broker Partner Center » MktwHulbert's Latest Tweets"Mark Hulbert: Should you sell in April and go away? http://on.mktw.net/fwG08W" 11:01 p.m. EDT, March 31, 2011 from MktwHulbert
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"Mark Hulbert: Market now higher than before earthquake http://on.mktw.net/hiiogO" 11:10 p.m. EDT, March 21, 2011 from MktwHulbert
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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2958322:22pU.S. stocks begin April on an upbeat note
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8c077dc4-5ad2-4f73-b9c3-a381c5fece05:2958252:01pBREAKING
Toyota U.S. March sales fall 5.7% to 176,222 units
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MARK HULBERT Sell in April and go away? Stock market timers generally have poor success rates, rarely outperforming buy-and-hold investors. But a few practitioners deserve a closer look. /conga/kiosk/commentary.html 137630 1238832000000 1270368000000Commodities Corner
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Crops dusted With U.S. corn supplies dwindling, farmers are planning to plant a near-record crop as market pressuresOn 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 that 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 autumn 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 has data for both market timers' modifications of the Halloween Indicator back to mid-2002, nine 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 14,101, -12.77, -0.09%) ; 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% 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% annualized return. Though this 6.3% is below that of a buy-and-hold, it was produced with 35% 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% 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% 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% annualized return (and with 35% 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 advisers 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.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
Is the third time a charm?
11:10 a.m. Today11:10 a.m. April 1, 2011
"Mark Hulbert: Should you sell in April and go away? http://on.mktw.net/fwG08W" 11:01 p.m. EDT, March 31, 2011 from MktwHulbert
"Mark Hulbert: The market's first quarter, by the numbers http://on.mktw.net/ggrYI7" 6:34 p.m. EDT, March 30, 2011 from MktwHulbert
"Mark Hulbert: Gold market optimism at worrisome levels http://on.mktw.net/flIfBX" 11:54 p.m. EDT, March 28, 2011 from MktwHulbert
"Mark Hulbert: How corporate insiders reacted to Japan http://on.mktw.net/eHPRoZ" 11:28 p.m. EDT, March 22, 2011 from MktwHulbert
"Mark Hulbert: Market now higher than before earthquake http://on.mktw.net/hiiogO" 11:10 p.m. EDT, March 21, 2011 from MktwHulbert
Consumer Confidential
Take that tax refund and spend it
Editor's View
Six threats to stocks in the second quarter
No-Nonsense Investing
China's economy may soon hit the brakes
Money and Power
In victory, tea party can taste only ashes
Have developed markets had their fun?
Read Full Article »