The usually insightful Mark Hulbert has written a column about the Halloween indicator. A few months ago, he had the good sense to give the fabled Super Bowl Indicator a sound debunking.But in his most recent column about the Halloween indicator, he makes a tragic leap in logic: Historically, it seems to work and therefore there's a reason to believe there's something to it. In my own piece on the Super Bowl indicator a few months ago, I wrote this:
When examining investing strategies (along with strategies for life in general), we should look not for evidence of past success, but a compelling reason that a strategy works. For instance, Warren Buffett's strategy of buying well-run companies with strong competitive advantages at cheap prices relative to their cash flow makes intuitive sense. And it has yielded strong results in the past and seems likely to continue to do so. But what about homing pigeons and bullish haramis? Is there any reason that Fibonacci sequences would be the key to picking stocks that will beat the market?
Given the tendency of humans to see patterns where none exist -- and for technicians to develop algorithms to find patterns in historical events -- I'm inclined to dismiss the Halloween indicator as being about as relevant as the Super Bowl indicator. I just can't think of any reason why it would be anything other than randomness, and I doubt that it is.
[photo Tasitch]
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Reader Comments (Page 1 of 1)
10-01-2007 @ 3:40PM
Don Martin said...
Hence the danger of data dredging. In fact, it would be very unusual to select any break point for comparing half-year returns and find the long-term returns to be identical for both half-year periods.
However, I suspect that there is a sociological component to the past return differentials between May-October vs. October-May. From an industrial/commercial perspective, the seasons of the northern hemisphere dominate those of the southern hemisphere. Furthermore, mankind has a tendency to misbehave more in the summer months than in the winter months. Summers are when currencies tend to collapse, embattled presidents resign, and dictators lose their minds and invade their neighbors.
It doesn't help that hurricane season runs from June to November either.
So, while I wouldn't advise anyone to adopt a "seasonal investing" approach, it's easy to understand why a return differential developed between the May-October and October-May segments of the calendar. However, now that so many people have seen this differential and have changed their investing behavior, this differential is likely to dissipate or disappear altogether in the future.
The phenomena is not unlike what we saw with the "Dogs of the Dow" strategy. It worked pretty well until too many people starting piling into it. It's that piling on that destroyed the return differential the "Dogs of the Dow" enjoyed. If enough people pile into the seasonal investing strategy, they'll kill it in exactly the same fashion.