By Mark Hulbert
Why "buy and hold" works better than "sell in May and go away" and most other market timing bets
Some stock market professionals believe they have a way to do better than the seasonal six-months-on, six-months-off trading pattern known as the "Halloween Indicator." Their strategy is not to "sell in May and walk away," avoiding the market's worst six months. It will be sold now, in April, and will be ahead of the rest.
This "momentum" approach is just one of several different ways advisors are trying to modify the Halloween indicator. Here is a review of the different approaches I know of and their performance records.
1. The "original" strategy
The original Halloween indicator strategy waits until April 30th to exit the stock and re-enter the market on October 31st. Since its inception, the Dow Jones Industrial Average DJIA has returned an average of 5.3% between October 31 and April 30 (the so-called "winter" months). In the "summer" months between April 30 and October 31, the Dow's average gain was 1.8%. (The difference between these two results is significant at the 95% confidence level that statisticians typically use to determine whether a pattern is genuine.)
Despite this statistical significance, this original strategy does not necessarily make more money than buying and holding a US market index fund. That's because the stock market's below-average summer performance may still be better than the interest you could earn by using cash during that time. Since 1934, the earliest date for which I was able to obtain data on 90-day U.S. Treasury bills, the Dow's average summer return was 1.9%, slightly better than the comparable 1.7% return on U.S. Treasury bills. of the Treasury.
This year-round buy-and-hold advantage was particularly evident in recent decades when interest rates were below average. My audit firm has data for this original strategy dating back to May 1990. It has since produced an annualized return of 9.5%, versus 10.7% for buying and holding a stock market index fund. broad (represented by the Wilshire 5000 Total Return Index XX: W5000FLT).
2. The "push" strategy
Over the years, various newsletters have recommended different versions of "momentum" strategies. Today I only know of one: The Stock Trader's Almanac, edited by Jeffrey Hirsch. He writes that "starting on the first day of April, we prepare to exit... as soon as the market falters," and do just the opposite in the fall: "Starting on the first trading day of October, we seek to recover the first sign of an upward trend in the market". (Hirsch relies on a trend-following indicator known as MACD, which stands for "moving average convergence and divergence." The market weakness in early April was enough for him to switch to cash in this strategy, almost a month before than the original strategy do it.)
My performance auditing firm has data for this "momentum" strategy dating back to mid-2002. Since then, a portfolio that switched between the Wilshire 5000 index and Treasury bills following Hirsch's cues would have produced an annualized return of 8.1%. This is identical to the 8.1% return produced by the "original" strategy and 1.8 annualized percentage points less than buy and hold.
3. The 'sector rotation' strategy
This strategy is a variant of the original strategy, but instead of moving into cash during the summer months, it moves into more conservative sectors of the stock market. Returns to more aggressive sectors in the winter months. This particular approach has been advocated by Sam Stovall, chief investment strategist at CFRA Research. He laid out a version of the strategy in his 2009 book, "The Seven Rules of Wall Street," and in July 2018 an exchange-traded fund was created to follow it: The Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF SZNE.
The ETF has significantly lagged a broad market index fund since its inception. From early August 2018 through March of this year, according to FactSet data, the ETF produced an annualized return of 9.5% annualized, 3.5 annualized percentage points below the Wilshire 5000 Index's 13.0% annualized return. Total Return. The strategy performed much better in backtests.
4. The โno midterm summersโ strategy
This variant of the Halloween Indicator is charged only one summer out of four. It is based on research that found that the Halloween indicator exists only because of the summer before the US midterm elections and the winter after. In the other three years of the US presidential cycle there is no statistically significant difference between the results of the summer and winter months.
In fact, an approach of raising cash in the summer months leading up to the midterm elections but otherwise remaining fully invested has worked significantly better than the original strategy. Since 1990 it has produced an annualized return of 11.5%, 2.3 annualized percentage points better than the original strategy and 1.1 annualized percentage points better than buy and hold.
However, since 2024 is not a midterm election year, the investment implications of this strategy for the next two years will be no different than buying and holding a broad market index fund.
Three of the four variants of the original Halloween indicator strategy have a mixed track record, adding value in some periods, but not all. The one that wins most consistently, as you can see in the table above, is the "don't participate in midterm summers" strategy. Keep this in mind in April 2026, two years from now, before the summer before the next midterm elections.
In the meantime, buying and holding a broad market index fund may be the best way to profit from the summer's seasonal weakness in the stock market.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at mark@hulbertratings.com
More: High-flying stocks are everything to Wall Street, but not to Main Street
Read also: The American stock market has been outperforming the European one for years. 2024 could be different.
-Mark Hulbert
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04-13-24 1110ET
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