The Alter Ego of the Spooky “Sell in May and Go Away”

Even if you’ve never actually read Robert Louis Stevenson’s novel, The Strange Case of Dr. Jekyll and Mr. Hyde, you’ve likely heard of the famous character with two drastically different personalities.

In this tale about the duality of human nature, Stevenson tells of the respected and reputable Dr. Jekyll who, after drinking a serum of his own creation, transformed into the evil and uncaring Mr. Hyde in order to indulge in his darkest urges.

In his disguise as Mr. Hyde, the titular character is the exact opposite of his upstanding counterpart, Dr. Jekyll. Hyde performs unspeakable monstrosities – including assault and murder – but is able to avoid capture and prosecution by transforming back into the good Dr. Jekyll.

In the end, Dr. Jekyll’s serum grows less and less effective, causing him to lose control of his ability to control his metamorphosis. As a last resort, Jekyll resolves to “bring the life of that unhappy Henry Jekyll to an end.”

Now that October is past us, there is a seasonal trend that is bringing the market’s version of Mr. Hyde – with all of its volatility and diminished gains – to an end, and returning us to much more pleasant, profitable times.

Here’s what I mean…

The Halloween Indicator

There is no shortage of Wall Street sayings – but one that has actually proven itself time and again is, “Sell in May and go away…” Many times, old bromides like this fail to stand up to scrutiny. Why do I like this seasonal trend so much? Because it just plain works.

You have undoubtedly heard of this seasonal trend by one of its many monikers. There’s the old trader’s adage that says, “Sell in May and go away.” The other half of that story is to buy on Halloween. So the same seasonal tendency is also called the “Halloween Indicator”. Some people call this the “Best Six Months” indicator. And if you look around, you’ll find some boneheaded pundit saying it doesn’t work. I’m here to tell you, they’re very wrong. This is one old adage that really works. And has for centuries! (More on that below…)

There is certainly very compelling data for U.S. markets, going back to post-WWII that shows this seasonality pattern to be very consistent. The folks at “Chart of the Day” produced this graphic that shows the gains made in the “best six months (November – April) compared to those made from May – October:

The very light grey line that is highest on the chart represents the total returns of the S&P 500 since 1950. The dark blue line below it shows returns made just in the Nov – April time frame. This seasonality doesn’t work every single time. But over 68+ cycles, it has proven to be extremely robust.

To see just how robust, today I want to dig into one of the first academic papers that validated this phenomenon – and then in a future article, I’ll dig even deeper.

Bouman and Jacobsen published a paper in 2001 in American Economic Review showing that 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.”

A seasonal effect with validity dating back the 1600s! That’s pretty cool. The following chart shows how striking the outperformance is across developed countries:

And this one shows similarly impressive results in the emerging markets:

So as we head into the seasonally strongest “six best months”, we’ll look for other, far shorter-term indications of market health. But with both Halloween and the six worst months behind us, the markets don’t look very scary right now…

But no matter whether the market is in its seasonally best six months or its seasonally worst, my colleague Shah Gilani is an expert at finding potentially profitable trade recommendations.

Even during the period of time that is almost always the worst six months of this year, Shah has given his subscribers the chance to see astounding profits of 165%, 350%, 400%, and an unbelievable 500% in whole and partial closeouts through his elite research service, The Money Zone.

With results like those in what are almost always the worst six months of the year going back several decades, imagine what Shah’s trade recommendations can deliver in what are almost always the best six months. November is already upon us, so now is the time to act. Click here to learn how you can get access to Shah’s incredibly lucrative Money Zone. P’

Great trading and God bless you,

https://moneymorning.com/files/2014/10/sig_drb.png

D.R. Barton, Jr.

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