#861 October 25, 2017
  • Feature: It’s Scary How Well the Halloween Indicator Keeps Working by D. R. Barton, Jr.
  • Workshops: Forex Discounts End Next Wednesday!
  • Tips: Transitioning Into a Swing Trade by Gabriel Grammatidis
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November Workshops

Feature Article

It’s Scary How Well the Halloween Indicator Keeps Working
by D. R. Barton, Jr.
Every few years, I like to check how some of the seasonal indicators are working. Since Halloween is just around the corner, let’s take a look at how the Halloween Indicator is doing.

For more than a decade I’ve written columns for Van’s Tharp’s Thoughts newsletter. My favorite research continues to go into the old Wall Street sayings with seasonal bits of advice to investors. So before we jump into the scary-good Halloween Indicator, here is a sampling of seasonal pieces of advice that I have confirmed or busted in past articles:

The January Effect claims that small cap stocks outperform large cap stocks during the month of January.

Findings — It worked well through the 1980s and still has a slight edge. Since the 1987 crash, however, a significant edge comes now by moving the period back to the last two weeks of December. We should probably rename it “The Last Half of December Effect…”

The First Five Days claims that the direction of the first five days of January provides a useful indicator for stock performance for the rest of the year.

Findings — We busted this one. Since there’s no requirement for the size of a move, even a one penny improvement at the start of January would supposedly tell us what the rest of the year will do. If we add a filter that requires the move to be more than just random noise, the whole analysis falls apart. Ignore this adage.

The January Barometer: Claims that as January goes, so goes the rest of the year.

Findings — We busted this indicator too. The January Barometer did work decades ago but since 2000, this indicator has produced a loss of 8.5%.

Sell ‘em on Rosh Hashanah and buy ‘em on Yom Kippur: Rosh Hashanah is the Jewish New Year, and Yom Kippur is a Hebrew holy day known as the Day of Atonement, which happens a week after Rosh Hashanah — on varying dates in September and October.

Findings — Continues to work remarkably well. Multiple studies including one peer reviewed academic paper show a statistically significant down period for stocks during this short timeframe in the fall.

That brings us to the Halloween Indicator.

Normally at this time of year, the only madness that I have to put up with is an incomprehensible number of those Halloween costume shops that open up for six weeks in every vacant storefront. They apparently do quite well because in my neck of the woods, they’re stinkin’ everywhere.

But the last few years, a different and more annoying trend has gotten out of control about which I have written previously. If I see one more pumpkin flavored anything, I’m going to scream…

I get flavor fads. They inject new sales life into lethargic coffee and bagel sales. But now they are putting the flavor of pumpkin in beer. Every beer. I went to buy some beer as a gift for a friend this morning and I had to walk halfway to the back of the store just to find a beer that was not gourd-infused. Beer is only the latest addition to the list - there is pumpkin flavored everything: Peeps, waffles, M&M’s(!), ice cream and Oreos. Nestlé’s even has pumpkin chips (instead of chocolate chips) so you can make your own pumpkin flavored abomination in the comfort of your home. This seasonal picture sums up everything nicely:
D.R. Chart 1
Yet my screams will fall on deaf ears. Pumpkin stuff sells — and so it will persist.

There are lots of pumpkin-flavored spoofs out there, too. I’ve seen pictures of pumpkin flavored KFC, Chipotle burritos, even Remington buckshot! (Please email me at drbarton “at” vantharp.com, the most outrageous pumpkin flavored something that you’ve seen and I’ll include the best ones in an upcoming article.)

Now onto something from Halloween that is actually useful…

The Halloween Indicator: It Just Plain Works

Many times, old Wall Street bromides fail to stand up to scrutiny — but there’s one that has actually proven itself useful time and again, “Sell in May and go away…”. Selling in May and buying back at Halloween (the end of October) is the strategy behind “The Best Six Months” seasonal tendency — which many know as the “Halloween Indicator”.

My personal preference for this has been backed up by two peer reviewed papers which show how well this seasonal tendency works — going back centuries. Bouman and Jacobsen published a paper in 2001 in the American Economic Review that showed how the November to April time frame outperformed the May to October period by a statistically significant amount. Here is their conclusion:

“Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The ‘Sell in May’ effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694.”

The following two charts show the striking outperformance across developed countries:
D.R. Chart 2
And this one shows similarly impressive results in the emerging markets:
D.R. Chart 3
But the support for this great seasonal tendency doesn’t stop there. Jacobsen and Zhang published an impressive and far-reaching academic paper published in October of 2014. The authors expanded Jacobsen’s work from 2001 and updated the data. They found that the “Best Six Months” had statistically significant outperformance in all 108 out of 109 active stock markets in the world! (The lone exception? An island country in the middle of the Indian Ocean called Mauritius.) Here’s their chart that shows the vast outperformance for the “Best Six Months” vs. buy and hold:
D.R. Chart 4
That outperformance is stunning but the research shows the outperformance of the six best months vs six worst has grown stronger during the most recent decades. The graph below shows the size of the Halloween effect (the difference between 6-month returns November-April and May-October) for 31 ten-year sub-periods from 109 pooled countries over the period 1693-2011:
D.R. Chart 5
Most of the seasonal effects mentioned above show dwindling effectiveness as more people find out about them and try to exploit them earlier, etc. But that’s just not the case for the Halloween Effect! Like a fine wine, it seems to be getting better with age…

Some pundits have written, with a shorter-term data set, that the Six Best Months has worked over the past few years, but note that the period between May and October has also been strong. I’ve crunched new numbers for you and despite one of the strongest and longest bull markets of this century (since March of 2009), the Halloween indicator still holds true. The Six Worst Months vastly underperformed in the following years (all numbers as percentages):

  • 2010 (-0.3 vs. +15.2)
  • 2011 (-8.1 vs. +11.5)
  • 2012 (+1.0 vs. +13.1)
  • 2016 (+2.9 vs. +12.1)

(4 out of 8 years in a strong bull market – dang this thing’s good!).

Here’s what that looks like on a chart (a bit busy to be comprehensive):
D.R. Chart 6
You can see how many times the red arrows are down or sideways vs. how many times the green arrows go down (only once, and for only -0.7%).

In addition, even though the April 2009 — October 2009 period was exceptionally strong (+30.2%), the average for all the six month periods shows a 57% outperformance for the Six Best Months which averaged 8.3% during the current bull market vs. +5.3% average return for the Six Worst Months.

It’s a seasonal trend that just keeps on working.

I always love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com.

Great Trading,
D. R.
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Trading Tip

Transitioning Into a Swing Trade
by Gabriel Grammatidis

D.R. Barton
The video below very nicely shows how 2 systems (here S2 and S1) can come together at the same time as the currency pair at different timeframes.

It also shows how the 200SMA can play the role of resistance protecting the stop and, in a higher timeframe, how it can act as a magnet towards reaching the trade target.

This trade really developed and at some point in time the decision was taken to transition it into a Swing Trade with the result of trailing the stop in higher timeframes.

Watch this 7 minute video from Gabriel that shows
how this trade transitioned into a Swing trade.
Swing Transition
About the Author: Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and shares his knowledge at his Forex and Live Forex Trading workshops, held regularly at VTI.

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