Monthly Discussion



The Halloween Indicator - Revisited


It is more than three years ago that the Halloween Indicator was discussed in this newsletter. It is worth perhaps revisiting the subject particularly in view of the fact that another 5-year period has just been completed. 5-year intervals were considered in my book An S-Shaped Trail to Wall Street where I first discussed the subject.

To remind the reader, the concept of the Halloween Indicator has been introduced by O辿iggins in Beating the Dow.1 It states that that more than 85 percent of annual gains with the DJIA (just capital gains, not dividends) occur during the winter semester between October 31 and April 30. In An S-Shaped Trail to Wall Street by looking at 5-year intervals, I was able to confirm that over a 30-year history the DJIA gains during winter semesters were effectively the only gains. Now we have one more 5-year period to take into account.

And the effect persists. Non-fertile summer semesters have hosted not only stock market crashes, in 1929 and in 1987, but also the 911 catastrophe, if for different reasons. As with the crashes, the market recovers immediately following the dip擁f modestly蓉ntil next April.

Exhibits 3 and 4 show the detailed evolution of capital returns from the DJIA over the last 35 years. We see both semester gains and 5-year averages separately for the winter and the summer semesters. Between October 1968 and October 2003, winter semesters were characterized on the average by a 9.3% gain, whereas summers by a 1% loss.

Exhibit 3 shows a gentle but steady rise of the 5-year average gains (purple line). Such a rise is practically non-existent in the summer semesters (Exhibit 4). During the last five years and despite the much-talked-about bubble, the average gains during winter semesters were 7% whereas during summer semesters there was an average loss of 3.5%. The difference between summers and winters was 10.5%, very much in line with the winter-summer difference of the previous 5‑year intervals.





Exhibit 3. The evolution of capital returns from the DOW during winter semesters, defined as October 31 to April 30, during the last 35 years. The 5-year average (purple line) shows a gently rising trend.



Exhibit 4. The evolution of capital returns from the DOW during summer semesters, defined as April 30 to October 31, during the last 35 years. The 5-year average (purple line) shows practically no trend.


The fact that the phenomenon of winter-summer difference persists undaunted indicates that investors have not become aware of, or simply have not reacted in an important way to this piece of information. Otherwise the Efficient Market Hypothesis2 would have wiped the phenomenon out. But to the extent that it still exists, it constitutes an opportunity. Risk-averse strategies can indeed benefit from portfolios with six-months-on-the-market six-months-off-the-market strategies.


1 Michael O辿iggins and John Downes, Beating the Dow, HarperCollins, New York, 1991.

2 The Efficient Market Hypothesis (EMH) argues that all information available is already reflected in the price of the stock. It essentially says that there can be no secret successful schemes in the stock market. EMH comes in several versions. In its strongest wording it says that no matter where you get your information, it will sooner or later prove useless in obtaining better-than-market-average investment results.