Monthly Discussion



The Halloween Indicator


In Beating the Dow O’Higgins argues that 85 percent of gains with the DJIA (just capital gains, not dividends) occur between October 31 and April 30. He claims to have deduced this observation from data between 1925 and 1989. He points out that several market analysts have established that certain months have historically been significantly better for the market than others for a variety of reasons. His own explanation for the Halloween Indicator is fragmentary and presents a different argument for each month.

          Whatever the explanation, it is worth noting that hard facts corroborate this view. For example, both the 1929 and the 1987 crash occurred during the non-fertile summer semester. Furthermore, despite the fact that the 1929 crash signaled the beginning of a many-year decline, immediately following the crash the market increased—if modestly—until April 1930.

In An S-Shaped Trail to Wall Street I confirmed O’Higgins’ claim. Over the 30-year history that I examined in detail, the DJIA gains during winter semesters were the only gains. With two more years of history we can now update these observations and draw conclusions about where we are heading.

Exhibits 3 and 4 show the detailed evolution of capital returns from the DJIA over the last 32 years. We see both semester-by-semester and 5-year averages separately for the winter and the summer seasons. Between October 1968 and October 2000, winter semesters were characterized on the average by a 9.9% gain, whereas summers by a 0.7% loss.

Exhibit 3 shows a gentle but steady rise of the 5-year average gains. Such a rise is much less noticeable in the summer semesters (Exhibit 4). During the last two years the average gains differed by 14.4 percentage points (13.3% gain in the winters compared to 1.1% loss in the summers). Such a difference seems far from the usual 10 percentage points. We may expect smaller differences between winters and summers in the next few years.






Exhibit 3. The evolution of capital returns from the DOW during winter semesters, defined as October 31 to April 30, during the last 32 years. The 5-year average (purple line) shows a steady slow rise.




Exhibit 4.  The evolution of capital returns from the DOW during summer semesters, defined as April 30 to October 31, during the last 32 years. The 5-year average (purple line) shows a not-very-convincing rise.


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 Hypothesis* 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 six-months-off the market strategies.


* 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.