Mark Hulbert throws a bucket of cold water on the notion of the “Halloween Indicator” at The Halloween Indicator notes that the stock market tends to have higher returns from the period lasting from the beginning of November, i.e. Halloween, to the end of April. This indicator is also called “Sell in May and Go Away.”

This seasonal tendency has received substantial academic backing. Indeed this pattern is seen in the vast majority of markets since 1970. That is where Hulbert take issue with this pattern. His research shows that prior to 1970 in the U.S. there is little evidence of this pattern.

If the only evidence for that indicator’s existence were what happened in the U.S. market after 1970, then the pre-1970 experience would constitute a fatal exception. No matter how strong it appears to be, a three-decade pattern has little or no statistical significance if it is absent from the seven decades prior to those three.

However, the evidence that the researchers gathered in support of the Halloween Indicator’s existence was more than just the post-1970 experience of the U.S. market. They looked at stock market behavior in 36 countries besides the U.S., and found evidence of this seasonal pattern in all but one of them. In addition, they found evidence that it has existed in the U.K. stock market back to 1694. This body of evidence is probably strong enough to withstand the 70+-year exception that I find in the pre-1970 period in the U.S.

Nevertheless, this exception is a big one, and it should give us pause. If you are inclined to bet on this seasonal pattern, you should first answer for yourself why it would exist in the United States only in recent decades.

Hulbert asks a good question. Does the world-wide evidence outweight the seeming contradiction in the longer U.S. data set? Hulbert posits that the length and nature of summer vacations may have something to do with the issue. The issue may be more fundamental than this anecdotal evidence.

Some researchers have found a relationship between the length of the day, i.e. sunlight, is related to the amount of risk investors are willing to take. Seasonal affective disorder or SAD is a documented psychological phenomenon. You can find a paper by Mark Kamstra, Lisa Kramer, and Maurice Levi, entitled, “Winter Blues: A SAD Stock Market Cycle.” From the abstract:

Experimental research in psychology and economics indicates that depression, in turn, causes heightened risk aversion. Building on these links between the length of day, depression, and risk aversion, we provide international evidence that stock market returns vary seasonally with the length of the day, a result we call the SAD effect. Using data from numerous stock exchanges and controlling for well-known market seasonals as well as other environmental factors, stock returns are shown to be significantly related to the amount of daylight through the fall and winter.

The Halloween indicator is a little out of phase with the SAD effect, November 1st versus the Winter Solstice, but there is substantial overlap. This psychological evidence might provide a reason why there are seasonal tendencies in the stock market. This research is worth a look before this seasonal period gets underway.