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Halloween Effect




Investors are flying off the handle over Halloween as it is believed, historically, as the start of the winning season for equities. In fact, pretty much all the return on stocks is realized amongst November to April. Hence the term “Halloween effect”, which refers to the market anomaly of a monthly period which holds best return offered by stocks during November through April. The selling period, which is also known as “sell in May and go away”, is based on the premise of the six “winter” months of November through April. Using the mix of two, an investor using Halloween strategy would be fully invested for one six month period and out for the rest.

Correspondingly, as there is an effect on stocks that brings splendid opportunities, investors must construct a strategy towards the effect to obtain profit. In summer, investors ought to step away from investing in equities following their strategy. The Halloween strategy is to be fully invested for one six-month period and out of the market for the other six months of the year. Consequently, investors would acquire the foremost part of an annual return, yet with just half the subjection of someone who invests in stocks throughout the year

Many researchers believe that summer vacations do have  an impact on market liquidity, and that investors are turning towards risk averse characteristics during summer months. The same traders who leave for vacation in the summer will return its full force in the fall. In other words, the following evidence could result higher returns based on rising and falling trading volume. Does Halloween effect occur every year? According to the new research by Mark Hulbert in his MarketWatch, the “sell in May and go away” seasonal pattern actually only holds true in the third year of a U.S presidential term. In the other three years, there is no statistically significant pattern.

Analyzing data from 1987 in Hulbert Rating System, Hulbert finds that the “winter” period in the third year of a presidential term averages an 11% gain, while the “summer” averages a slight loss. In years one, two and four, “winters” are about 3% while “summers” gain about 2%. The Halloween indicator isn’t the only seasonal indicator in the market, but many researchers believe it may be one of the most robust indicators. There are other indicators that investors needs to exercise caution and consider factors from, including potentially elevated market valuations and investor’s own portfolio needs.


Sources:

Forbes

Investopedia

Marketwatch


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