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Wall Street’s Trick or Treat

Mark Hulbert, Special for USA TODAY 11:02 a.m. EDT October 13, 2016

Wall Street wants you back!

If you were one of those investors who this past spring “sold in May and went away,” you should know that the seasonal winds will soon shift and begin blowing in a bullish direction.

I’m referring, of course, to the well-known six-month-on, six-month-off seasonal pattern that goes by the name of the “Halloween Indicator.” Followers also refer to it as “Sell in May and Go Away.” In contrast to most of the alleged patterns that Wall Street claims to have discovered, this one turns out to be based on solid statistics. The stock market historically has produced the bulk of its gains in the “winter” months between Halloween and May Day.

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Since the Dow Jones industrial average was created in 1896, for example, it has produced an average winter gain of 5.2%, versus just 1.7% during the summer. Not only is this difference significant at the 95% confidence level that statisticians often use to determine if a pattern is more than just a random fluke, it is not unique just to the U.S. Ben Jacobsen, a finance professor at the TIAS Business School in the Netherlands, has detected the Halloween Indicator in almost all foreign countries’ stock markets as well, and as far back as 1694 in the United Kingdom’s market.

The stock market since this past May Day has closely followed this seasonal script. Earlier this week, for example, the Dow was 1.7% ahead of where it stood at the beginning of May, right in line with the long-term average. Halloween Indicator followers therefore have not missed out on any spectacular gains. In addition, they were able to sleep like a baby during the extraordinary volatility surrounding the surprising U.K. decision in late June to leave the European Union, as well as shrug off the tedium of the last two months during which equity investors were frustrated by the stock market’s unusually tight trading range.

To be sure, the upcoming six-month positive period will begin just as a hotly-contested election season comes to a close. Fortunately for followers of the Halloween Indicator, there’s no evidence that the winter months are any worse for the stock market following a Presidential election than in any other years.

Some investors may also wonder if the odds of a positive Halloween-through-May Day period are any different in years (like 2016) where the stock market didn’t actually go down during the preceding summer months. The answer is no.

Professor Jacobsen did find, however, that the Halloween Indicator is stronger in some industries and stock market sectors than others. The sectors which his research found to have the strongest historical returns during the winter months are automotive, chemicals, construction/housing, industrial equipment and industrial materials.

One way to exploit the Halloween Indicator in these sectors is to invest in exchange-traded funds that are benchmarked to them. Examples include the Select SPDR Industrials (XLI) and Select SPDR Materials (XLB) funds.

Several stocks within the S&P 500 from these seasonally-favored sectors are cheap right now, with price-to-earnings ratios below 10 (when calculated on the basis of estimated earnings per share over the coming 12 months). They include LyondellBasel Industries (LYB), Dow Chemical (DOW), and Pitney Bowes (PBI). The comparable P-E ratio for the overall S&P 500 index is 18.4.

Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers’ performances for four decades. For more information, email him atmark@hulbertratings.comor go to www.hulbertratings.com.

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