The Halloween Effect Explained

Halloween is nearly upon us and that means that we’re in full-blown spook mode. To help get you in the mood, this week we’re going to explain the phenomenon known as the Halloween Effect. Then we’ll do our usual roundup of the top fundamental events to watch out for this week. Grab a cushion to hide behind and read on… if you dare…

What is the Halloween Effect?

Before you ask, no, it’s got nothing to do with trading while dressed as a pumpkin. Although that does sound pretty cool.

According to legend, the Halloween Effect is the phenomenon whereby stocks perform better between the 31st of October and the 1st of May than they do between the beginning of May and the end of October.

By this theory, investors should make sure that they are fully invested in the stocks that they’re interested in between November and May, and then sell-off and run for the hills (or invest in something other than stocks) between June and October.

This is obviously not a buy and hold strategy, whereby traders stay strong during the down-periods in full faith that their investments will see better days. It’s quite the opposite in fact, and quite similar to the famous “Sell in May and go away” saying.

In reality, this probably has nothing to do with Halloween. The timings are thought to come from Great Britain, where the privileged class would leave London and head to their country homes for the summer, thus leaving the market and only returning to it in the autumn.

Does it actually work? ….. It’s scarily accurate.

Various studies have taken place over the years and they show that the strategy of selling in May is successful more than 80% of the time when employed over a five-year period. It’s more than 90% successful within a 10-year time frame. Wow.

The chart below shows the average returns within a six-month period between November to April, compared with that of the following 6 months between 1995 and 2017.

Source: YourMoney.com

As you can see, this is a truly global phenomenon. Spooky stuff indeed!

Why does this happen?

This is the best bit — no one really knows for sure! This is both an empirically proved anomaly yet still a total mystery.

Some have theorised that this is simply down to seasonality, that there are less people in the market over the summer months. Yet, that assumes that more traders in the market means more gains. We know that’s absolutely not true. If only!

What do you think?

Trick or treat? Do you believe in the Halloween Effect? Tweet us your thoughts at @_Contentworks.

Top trading events this week

There’s a fair bit going on this week, here’s when and where you need to tune in.

Monday

● No major events are planned.

Tuesday

● GBP — Employment Change (JUL)

Wednesday

● EUR — Germany Inflation Rate YoY Final (SEP)

● GBP — GDP 3-Month Avg (AUG); GDP YoY (AUG)

● USD — Core Inflation Rate YoY (SEP); Inflation Rate YoY (SEP); FOMC Minutes

Thursday

● AUD — Employment Change (SEP); Unemployment Rate (SEP)

● CNY — Inflation Rate YoY (SEP); New Yuan Loans (SEP)

Friday

● USD — Retail Sales MoM (SEP); Michigan Consumer Sentiment Prel (OCT)

Here at Contentworks we closely follow market movements and prep content that we think your traders would love to read. Let’s get you started right here.

Speak soon,

The Contentworks team