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Mark Hulbert recently published a story on marketwatch.com: Hybrid Halloween Indicators. The original Halloween indicator (or sometimes called "sell in May and go away") has been studied extensively. In his story, Hulbert mentioned a research paper published in 2002 in his article. The paper found that most stock markets around the globe indeed exhibited such abnormality: "sell in early May and buy in late October" could achieve excessive risk adjusted return. The improved strategy proposed by Sy Harding (detailed description could be found here and here) issued a buy signal on Friday Oct. 16, 2009. This strategy uses MACD to further pinpoint the buy/sell dates around April and October time frames. It is pertinent to compare such a strategy with the original strategy as well as with the buy and hold strategy at this time. The "original" strategy dictates that one sell on April 26th and buy on October 16th. The following table compared the performance of the three strategies from 7/1/1971 to 10/16/2009. All of them use Wilshire 5000 total return index as the proxy to the stock market investment and use 13 week treasury bill as the cash when they are out of the stock market.

Since 1971 Last 5 Years Last 3 Years Last 1 Year
AR (%) Original 7.769 2.544 -1.938 -7.138
AR (%) Improved 8.236 2.696 1.364 3.777
AR (%) Wilshire 5000 6.733 0.693 -6.55 17.488
Sharpe (%) Original 28.915 3.211 -15.331 -20.388
Sharpe (%) Improved 38.481 5.097 -1.172 14.826
Sharpe (%) Wilshire 5000 16.064 -5.257 -27.383 45.033
Max. Drawdown (%) Original 35.107 35.107 35.107 32.114
Max. Drawdown (%) Improved 33.073 33.073 33.073 27.306
Max. Drawdown (%) Wilshire 5000 56.645 56.645 56.645 32.13


From the table, one could see that the "improved" strategy does the best in terms of overall return and risk. Overall, one could clearly see that both "original" and "improved" strategies have outperformed the buy and hold strategy.

click to enlarge
STS10172009
From the above graph, we could see that the "improved" strategy waited till the end of 2008 to get into the stock market, thus sidestepping some loss that the "original" strategy incurred during the October to December time frame. Unfortunately, both of them suffered a great deal from the March steep decline. This is a clear reminder that such strategies are not fool proof and they are still subject to stock market's big swing. Given the steep run-up of the stock market so far, a favorable seasonality backdrop should be treated just as a backdrop: one should not blindly follow the strategy alone but instead, taking such a statistical evidence into consideration during your portfolio management such as portfolio rebalancing.

Disclosue: No positions

Source: Halloween Indicators Issue Buy Signals: Now What?