Halloween Strategy

What is the Halloween Strategy?

The Halloween strategy refers to a market-timing strategy that is built off the thesis that equity securities perform better between October 31^st and May 1^st.

Investors who invest using the Halloween strategy will purchase stocks in November and eventually sell the stocks in April. During the remainder of the year, investors using such a strategy should be investing in other asset classes. However, some investors believe they should not invest at all during the summer months.

Origin of the Halloween Strategy

The Halloween strategy originated in the 16^th century in London, England. Newspapers in the United Kingdom frequently used the phrase “sell in May and go away,” and the maxim became popular among retail investors in the 1980s when The Wall Street Journal wrote a piece on the British stock market.

The expression alluded to how the month of May signals the start of a bear market and that investors should close their positions and instead hold cash.

In 1990, “Beating the Dow” by Michael O’Higgins and John Downes was released. The investment strategy book built upon the British adage “sell in May and go away” and popularized the Halloween indicator.

In their book, O’Higgins and Downes suggested that investors enter the stock market on October 31^st and exit the market on April 30^th.

Does the Halloween Strategy Work?

According to the American Economic Review, monthly stock returns for major stock exchanges did produce greater returns during the November to April period.

In the study, 36 of the 37 markets examined had equity securities generate greater returns from November to April. The study’s findings cast doubt on the validity of the Efficient Markets Hypothesis.

The Efficient Markets Theory states that profitable mechanical trading rules should not exist. If the Halloween strategy was a foolproof method to maximize returns and minimize risk exposure, all investors would exploit the strategy through arbitrage.

Thus, the Efficient Markets Hypothesis directly refutes the existence of the Halloween strategy.

The higher returns during the November to April period can potentially be explained by higher risk in the period, the result of a calendar time anomaly, shifts in interest rates, shifts in trading volume, and stock returns can be lower over the May to October period because of a seasonal factor in the news.

What is a Calendar Time Anomaly?

An example of a calendar time anomaly is the January effect. It is a seasonal tendency that stocks tend to rise during January because of a ride in stock-buying due to the drop in price that usually occurs in December.

The loss of capital appreciation in December can be attributed to investors engaging in tax-loss harvesting to offset capital gains that were realized during the year.

Other Calendar Time Anomalies

• Halloween indicator: Equity securities experience higher returns between October 31st and May 1^st.
• January barometer: Stock market performance in January predicts the performance for the rest of the year
• Mark Twain effect: Stock returns in October being lower than in other months. This one originated from Mark Twain’s book Pudd’nhead Wilson.
• July effect: Also referred to as the July phenomenon, is the perceived increase in the risk of surgical complications and the risk of medical errors.
• Santa Claus rally: Describes a sustained increase in the stock market that occurs during the first two trading days in January. This is said to be primarily driven by optimism in markets, holiday bonuses, and tax considerations.
• Super Bowl indicator: The theory proposes that a Super Bowl win for a team from the American Football Conference of the National Football League forecasts a bear market in the following year. If a team from the opposing National Football Conference wins the Super Bowl, a bull market is forecasted for the following year.
• The U.S. Presidential election cycle: The theory suggests that American stock markets perform the worst in the years following the election of a new president.

Additional Resources

CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

• Economic Calendar
• Volume of Trade
• Stock Market
• Efficient Markets Hypothesis
• See all management & strategy resources