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October, 2016

TRICK OR TREAT
by LARRY

The seasonal stock investing strategy called Halloween Indicator, often also referred to as Sell in May and Go Away, does apparently work. As mentioned here earlier, it is one of a few seasonal timing approaches that are viable in terms of risk reduction. Updated through the end of 2015, using this method the twenty-year total return of the S&P 500 Index would have about tripled one's investment despite exposure to equity volatility only half the time, for one would have been invested in tradable securities during merely the six months between the market closings on October 31 and on April 30 (or the closest trading days prior to those dates if they would have fallen on a weekend).

While not as large a gain as one would have had by being fully invested in the S&P 500 Index year 'round, it is about 2/3 of the buy-and-hold return for the index over that 20-year period. Another way of putting it is that the results for November through April averaged about 50% more than those for May through October, definitely a nice treat offered by the Halloween Indicator method.

If more comfortable experiencing fewer downward swoons in the market than with the extra 1/3 total return associated with having your investments working for you 12 months a year, this technique may be for you. There are downsides to the Halloween Indicator (HI) approach, though:



  • Taxes on short-term gains (generally those for holdings of less than a-year-plus-a-day) will offset some of the advantage of being invested only in the more favorable six months of each year.

  • The HI does not work every year, so when it does not, and the sum of price appreciation plus dividends in the preceding November through April period is rather low or even shows a negative total return, one could well consider this a bad trick played on the investor by the strategy and regret the decision to be a seasonal investor.

  • There is a danger, then, that one would sell his or her holdings at that point and wait for a seemingly more opportune time to be an investor. Typically, this means selling when stocks are lower and buying back into the market when they are higher, almost a guaranteed way to lose money.


Halloween Indicator Picks
CompanyTicker
Symbol		Recent
Price		Dividend
Yield		Market
Cap.
Amazon.Com, Inc.AMZN$812.950.0%$381.1 B
AT and T, Inc.T$39.274.9%$241.6 B
Eaton Corp.ETN$63.123.6%$29.2 B
Fly Leasing, Ltd.FLY$11.910.0%$492.2 M
Frankling Resources, Inc.BEN$33.822.1%$20.3 B
LGI HomeLGIH$32.490.0%$650.1 M
Manning and NapierMN$7.558.5%$111.6 M
Novo Nordisk A/S (ADR)NVO$40.332.6%$106.9 B
P.H. Glatfelter Co.GLT$21.812.3%$946.7 M
Qalcomm, Inc.QCOM$65.193.2%$98.0 B
Signature BankSBNY$115.500.0%$5.6 B
Skechers USA, Inc.SKX$22.120.0%$3.5 B
The Greenbrier CompaniesGBX$35.452.3%$1.0 B
Total, SA (ADR)TOT$40.332.6%$106.9 B
Universal Insurance Holdings, Inc.UVE$23.502.5%$836.6 M


  • In addition, though investment in only November through April on average reduces short-term market risk, one may not like how much it also lowers total returns. For the 20 years through 2015, the S&P 500 Index buy-and-hold, 12 months a year method averaged a compound annual return of about 8.4%, while that for just the more favorable 6 months was around 5.7% a year. (Individual stocks may, of course, do better than these market average results. Indeed, even without further refining, the candidates in this essay's table, unless held for just a short period or there is the type market meltdown we experienced in late 2008, are likely as a group, I think, to have a better total return than the S&P 500 through either April, 2017, or the end of next year.)


There is a variation I like in the HI technique, but it requires consistency to work out well, so, please, no selling ahead of time if things turn south, and be willing to still use the strategy in subsequent years. Invest 1/4 of one's planned investment dollars during the less favorable May through October period, 3/4 during the November through April months. After each Halloween, triple one's equities amount, putting the extra dollars into somewhat more volatile (higher Beta) assets than one might normally like to hold long-term. Then, right before the first of May, sell off riskier stocks and hold onto the smaller dollar amount of less volatile core holdings, perhaps, for instance, shares of Berkshire Hathaway, Class B (BRK/B). To avoid extra taxes, it is useful to keep one's seasonally traded stocks or stock mutual funds in tax-deferred accounts.


If interested in either HI approach, the assets at the table might be considered for the next favorable period. Statistically speaking, it is unlikely all of them will do well in the upcoming November through April half-year. I wish I knew which ones would not, but of course do not. They each look good to me for both value and growth, yet nothing is certain, and most portfolios have a few that disappoint. I would suggest that all 15 be carefully researched and that readers pick out and invest on November 1 in the 5-10 of them that then seem most appealing. Hopefully the results will be rewarding, not tricks but treats and nicely sweet for your financial cookie jar.


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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