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Is the Halloween Indicator Flashing "Buy"?

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Markets are at significant resistance levels but are still very much within the confines of a bear market. If these levels can be broken, the Halloween Indicator could be flashing a buy.

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Is it time to buy major indexes like the Dow Jones Industrials (DIA) and the S&P 500 (SPY) according to the "Halloween Indicator"?

According to the "sell in May and go away" strategy, we've just ended the worst six months of the year, and around Halloween will be entering the best six months of the year.

Seasonality tells us that statistically the months from the end of October through the end of April are, in fact, the best months of the year for investing, while the six months from May through October are the worst.

But is there any validity to what's sometimes known as the Halloween Indicator?

It turns out there is a body of research that supports this theory, and one of the best sources of information on this subject comes from Stock Trader's Almanac which actually has developed a trading indicator based on this seasonality and the historical returns it has generated.

Let's take a look at some of Stock Traders Almanac's findings:

On a historical basis, the research indicates that the market generates better rates of return from November through April than from May through October. And the difference is significant.

Over the last six decades, if you had invested on May 1 and closed your position at the end of October, you would have lost money. On the other hand, if you had invested only in the six "good months" you would have made money over the same time.

And here's another significant factor. I often point out how the S&P 500 and the Dow Jones Industrial Average have generated a negative rate of return since 2000. Both of the main averages are below their 2000 highs, so investors have lost nearly 10 years of their investing lives. But someone who invested in only the six "good months" since 2000 would be sitting on profits instead of long-term losses.

Also, it turns out that if you invested in just the six "good months" of the year, you would have beaten the overall return of the major indexes while having been invested for only half the time, thereby reducing your market risk and freeing up your assets to earn interest in low-risk money market or Treasury investments.

So these are significant findings, particularly as we come off a tough September. Recent gains have been near vertical and could be the start of a new seasonal bull market. In place of the panic selling we saw in September, we now are seeing panic buying that has zoomed the market up to significant resistance levels.

On a fundamental level, much of what happens will depend upon Europe. If they can avoid an international "Lehman moment," this would certainly support the bullish case. On a technical level, markets are at significant resistance levels but still very much within the confines of a bear market. If these levels can be broken and the new uptrend more firmly established, the Halloween Indicator could indeed be flashing "buy."

Editor's Note: Read more from John Nyaradi at Wall St. Sector Selector, a financial media site specializing in exchange traded funds, global markets and economic analysis.

Twitter: @WSSectorSelect

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No positions in stocks mentioned.

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