In this post, I will teach you the “Halloween effect”, a famous financial strategy.
Reading Time: 3 minutes Financial activity: Trading Knowledge level: Beginner
Summary
What is the “Halloween effect”?
Performance of the “Halloween
effect”
Why it works?
Conclusions
What is the “Halloween effect”?
The Halloween effect is
a market timing strategy based on the hypothesis that stocks perform better
from the first day of November (Halloween) to the end of April than they do
from the beginning of May through the end of October.
Do you remember the old
advice: “Sell in May and go away (and come again on St. Leger Day)”? It’s exactly
the same reasoning! You are invested for one six-month period and out of the
market for the other six months of the year.
Performance of the “Halloween effect”
Can such a simple
strategy really work? Let’s look at the graph below that displays the Halloween
effect for Standard & Poor’s 500 Index for the periods 1970–2017 and
1991–2017 (Source: Bloomberg):
It is evident that the
return on the S&P 500 Index is much higher from November through April than
it is from May through October.
Therefore, it works!
I suggest that you search and read some academic papers like this one: “Halloween Effect in
Developed Stock Markets: A US Perspective” by Alex Plastun, Xolani Sibande, Rangan Gupta, Mark E. Wohar (February
19, 2019).
Why it works?
Nobody knows! No one
has been able to find a reason for this seasonal anomaly.
Some think that
this happened because of the summer vacations of the professional investors, but
it’s nothing more than a hypothesis.
Conclusions
The Halloween effect is
a financial strategy that suggests that investors should be invested in stocks
from November through April, and out of stocks from May through October.
This strategy has
performed well over the years, but no one has offered a good explanation for the
reason why it works.
A sincere wish of good work to all!
Written by F. GRAMOLA
(*).
(*) Member of S.I.A.T.,
the Italian Society of Technical Analysis (member society of I.F.T.A. –
International Federation of Technical Analysts).
Warning
We merely cite our
personal opinions for educational purposes only.
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property of their respective owners.
Investing and trading
are risky. Don't invest or trade money that you cannot afford to lose.
Initial photo by David Menidrey on Unsplash.
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