Malcolm Graham
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Those who sold in May are looking to return to stock market

Followers of the Halloween Indicator will time their move back into the market

Even while much of Wall Street obsesses about a possible bear market and when to get out of the stock market, one group of investors is poised to get back in.

I am referring to followers of the so-called Halloween Indicator, which is based on the historical tendency for the stock market to produce almost all of its net returns between Halloween and the May Day six months later. Adherents therefore “Sell In May and Go Away” for six months, safely parked in cash until reinvesting it the subsequent Halloween.

This Indicator has worked like a charm this year, of course. The Dow Jones Industrial Average DJIA, +1.23% is 10% lower than where it was last May Day, which means that followers of the Halloween Indicator this year are that much ahead of a buy-and-hold strategy for doing nothing more difficult than go to cash when the calendar turned from April to May.

That’s remarkable, since most market-timing strategies don’t even equal the market’s return, much less beat it. And among those that do come out ahead, most do so by only a couple of percentage points.

Though “Selling In May and Going Away” doesn’t always work out as well as it did this year, it has done so far more often than not. One academic study, for example, found statistically significant evidence of this pattern’s existence in the histories of the more than 100 countries around the world that have stock markets. In the case of the United Kingdom, that meant the study analyzed data back to 1694.

This impressive history might very well convince you to follow this indicator mechanically, which would mean waiting until the last trading day of this month before re-investing the cash raised in the spring. Two advisers I track have been unwilling to leave well enough alone, however, and over the last decade have created timing systems that attempt to pick better re-entry points than Halloween (and better exit points than May Day).

The first of these two advisers is Jeffrey Hirsch, editor of the Almanac Investor Newsletter, and the other was the late Sy Harding, editor of Sy Harding’s Street Smart Report. (Harding passed away this past May.) Both of the modified Halloween Indicators that these advisers developed rely on a technical indicator known as MACD to pinpoint the precise day on which to enter stocks in the fall and exit in the spring. (MACD is a short-term momentum indicator, standing for moving average convergence divergence.)