A bit of a shock for 'Halloween indicator'

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The stock market proverb ‘sell in May and go away’ did not ring true this year, with the Australian share market producing a total return of 7.31% – ASX300 accumulation index – between 1 May and 1 November.

Also known as the ‘Halloween indicator’, the strategy is based on the belief the share market starts to fall away in May and market returns become considerably stronger in the November to April period than May to October.

According to investment researcher van Eyk Research, this indicator has relatively strong statistical evidence behind it but it does not occur every year. Since 1970, the May to October period for the All Ordinaries index has returned an average of only 1.15%, while the November to April period has returned 6.14%.

While the Australian share market did drop away sharply in May and June this year – the All Ords index dropping to almost its lowest closing price for the year – the forces driving the market higher have tended to overwhelm other factors, says van Eyk senior portfolio manager Otto Rieth.

“While investors are still apprehensive about the economy and the battles over the US debt ceiling, there has also been an unmistakeable, if modest, improvement in global macro indicators.”

There are “unprecedented amounts” of quantitative easing from the US and Japan, meaning monetary policy remains accommodating, Rieth says.

“Investors are also continuing to give strong support to stocks that offer a healthy yield given the relatively poor returns available from bonds and other assets.”

Some relief from concern over a slide in Chinese economic growth and the temporary resolution of the Washington standoff over the debt limit had also helped to support the market recently, says Rieth.

He points to the typically close relationship between the AUD/JPY currency pair and the ASX300.

“If Abenomics continues to push down the value of the yen, investors will be increasingly tempted to take advantage of the carry trade and borrow cheaply in yen to invest in higher yielding assets offshore, like Australian shares.”