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Rod Serling, where are you now?

People of my generation, or older, will remember the eerie genius behind the original "Twilight Zone" TV series -- the greatest sci-fi series ever made.

Serling, the creator, used to turn up during episodes, his trademark cigarette in hand, to explain just why that feeling of horror that was starting to creep up and down your spine was completely justified.

I mention Serling now because almost as soon as the month of May arrived the booming stock market started acting like it was being possessed.

Japan went crazy. Down 7% one day. Up 3% the next. Down 5% another day.

The Dow has plunged by hundreds of points since its mid-May peak. Dividend stocks, those supposed old reliables, have fallen flat on their face. The Treasury market is churning.

Some blame Shinzo Abe, the Japanese prime minister, who's loosening up Japan's famously tight monetary policy. Others are blaming Federal Reserve chairman Ben Bernanke, who hinted quantitative easing might be about to end.

Not me. I blame Wall Street's equivalent of the Twilight Zone.

The reason? There is an old wives' tale on Wall Street, summed up by the expression: "Sell in May, go away, and don't come back till St Leger's Day." (The St. Leger's Day in question refers to a famous British horse race which takes place in mid-September.) All you have to do to beat the market by a country mile, the tale goes, is to buy stocks every Halloween and sell them again at the beginning of every May. Rinse, repeat.

It sounds ridiculous. It sounds absurd. It sounds like a total joke in a stock market which – as the University of Chicago Business School mafia assures me – is completely rational, efficient and perfect in every way.

Unfortunately, although it may be crazy, it's also true.

Read the paper by professors Ben Jacobsen and Cherry Zhang at Massey University in New Zealand. They've basically looked at data for more than 100 stock markets. In some cases, such as Britain's, their data has gone back three centuries.

Sell in May is no old wives' tale. (Or, if it is, you need to hunt down that old wife and hire her as your broker.)

In a nutshell: Year after year, decade after decade, stock markets have generated all their returns in the winter months.

In an average year, according to Jacobsen and Zhang, an investor earned 7% during the winter months, and less than 2.5% during the summer months. And that's before inflation. In other words, after counting for inflation, stock markets have typically produced all of their returns during the winter months.

Those who sold in May earned much, much higher returns, they found, and had far fewer losses.

It makes no sense. It is completely irrational. And it certainly shouldn't work now that everyone knows about it, because investors should adapt. Yet it still does. "It does not seem to disappear or reverse itself after discovery, but continues to exist even though investors may have become aware of it," write Jacobsen and Zhang. Indeed the Halloween Effect has been getting bigger, they report. The real gap has been since about 1960.

And here we are, once again. Everything was plain sailing. Not a cloud in the sky. Not a breeze on the water. Then we hit May.

Cue Rod Serling. Cue that creepy music. "Your next stop: The Twilight Zone."

Behind the myth

Is there an explanation for this?

Jacobsen and Zhang, reviewing the academic literature, say summer vacations seem to play a part. Indeed countries with the longest summer vacations, such as in Western Europe, seem to have the biggest Halloween effect.

The strongest Halloween effect of all has been witnessed in Britain over many decades. As a long-standing rubbernecker of the British establishment, I can confirm that they basically take six months off once the summer arrives. "Sell in May and go away, don't come back till St. Leger's Day" corresponds with the English "season." Everyone is quaffing Pimm's and watching horses race each other in the rain.

Here's the twist. Every time someone sells a stock, someone else buys it. So if a bunch of potential investors are off at Wimbledon or the Hamptons for the summer it should not have an overall net effect on the market. Furthermore, their absence shouldn't really explain big day-to-day swings like the ones we've seen in recent weeks.

However... summer vacations might explain these summer swoons if those professionals' presence was needed in order to prop the market up.

If I were a Dan Brown junkie, or channeling the ghost of Zapata, I'd say: The summer months are when the Wall Street conspiracy goes on vacation. And guess what: When that happens, the market goes nowhere.

Make of it what you will. My Wall Street friends will doubtless object. They will argue, if I can quote the Twilight Zone, that their only real aim is To Serve Man. Kanamit style.

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