Should you sell in April and go away?

By Mark Hulbert

CHAPEL HILL, N.C. (MarketWatch) — Should you use the stock market’s turmoil as the occasion to get a jumpstart on the much-vaunted “Sell in May and Go Away” indicator? “Yes” is the answer from one of the two advisers I monitor who not only follow this indicator, but try to do even better by selling in April rather than always waiting until May Day. And the other is poised to give a “sell” signal as early as this coming Monday. This seasonal pattern, also known as the Halloween Indicator, refers to the stock market’s tendency to turn in its best performances between Halloween and May Day (the “winter” months) and to produce mediocre returns, at best, the other six months of the year (the “summer” months). Since the Dow Jones Industrial Average /quotes/zigman/627449/realtime DJIA +0.55%   was created in 1896, the market has produced a 5.2% annualized return during the winter months and 1.7% in the summer. To be sure, these are averages, and the seasonal tendency doesn’t work every year. The summer months in 2013 were one such exception, when the Dow rose 4.8% between May Day and Halloween. But it works enough of the time to be significant at the 95% confidence level that statisticians often use to decide whether a pattern is more than just a fluke. Another impressive statistical feat achieved by the Halloween Indicator: It’s become even more pronounced in recent decades. That’s noteworthy, because the more usual pattern is for tendencies to stop working once they are discovered and lots of investors begin to follow them. But not in this case. Ben Jacobsen, a finance professor at Massey University in New Zealand, says he found an article as long ago as 1935 in the Financial Times in which the “sell in May” pattern is referred to as something that was already well-known and followed. Even though the pattern nearly 80 years ago already had a solid historical foundation, Jacobsen says that, since then, the difference between the average returns in winter and summer has become even bigger. Given this impressive record, the odds would seem to be quite low of being able to do even better by exiting and entering the market during April and October rather than automatically waiting until May Day and Halloween. Stock-market timers in general have very poor success rates, rarely doing better over the long term than simply buying and holding. Well, the proof of the pudding is in the eating. And over the past 12 years, one of the two market-timing services that I monitor that regularly second-guess the “Sell in May and Go Away” system — Sy Harding’s Street Smart Report, edited by Sy Harding — has significantly increased that seasonal pattern’s performance. While the other one — Almanac Investor Newsletter, edited by Jeffrey Hirsch — has not improved on the Halloween Indicator, it at least has still beaten a buy-and-hold strategy. Both advisers 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 is a short-term momentum indicator, standing for moving average convergence divergence.) The Hulbert Financial Digest data in the accompanying table was calculated assuming these advisers earned the return of the Wilshire 5000 Index when on a “buy” signal, and otherwise the 90-day Treasury bill rate. The Almanac Investor’s Hirsch is the one adviser of this pair who is already on a “sell” signal, which he issued the evening of April 7. The particular rules Harding follows say that the earliest date on which he could get a “sell” signal is this coming Monday, and only then if the MACD is on a “sell” signal on that date. To be sure, you shouldn’t even consider selling in May and going away if you’re investing in a taxable account, since you will have to pay taxes on the capital gains you realize when selling. But if you’re investing in a tax-deferred account, both of these advisers will soon be in agreement that you may want to consider going to cash and thereby take the rest of the spring and summer off from stressing about the stock market.

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