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The Halloween effect

Even if you don’t live in North America and don’t wear costume or go ‘Trick or Treating’, you might be interested in hearing about a trading strategy called “the Halloween strategy” AKA “The Halloween indicator” AKA “The Halloween effect”.

What’s that? We’re so happy you asked…

First of all, we would like to stress that this is a theory, of course, not fact.

Some people choose to follow it while others question its accuracy, but all we can do is tell you about it.

It’s up to you to figure out if you want to follow it – and to what extent.

Now that we’re done with the disclaimer, let’s continue with the topic at hand.

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What is Halloween investment strategy?

The Halloween investment strategy is based on the theory that the stock market generally performs better between October 31st (which is, in case you didn’t know, Halloween) and May 1st.

Better than what? Better than its performances between May 1st and the end of October.

According to the theory, investors would do wisely to buy shares from November through April and invest in various other instruments in the rest of the year.

According to the theory, this could result in higher potential returns with lower exposure.

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Sell in May and go away

Halloween strategy is not very different from the commonly quotes phrase “sell in May and go away”, which, again, points out the idea of getting rid of shares before the summer.

What do experts say about this theory?

Not all that much.

For many years, in fact, the more “serious” academic experts completely ignored the whole “sell in May” concept, although it was quite known among investors.

In 2002 however, a couple of analysts named Jacobsen and Bouman found that the phenomenon had occurred in 36 out of the 37 countries examined.

What could be causing this?

One hypothesis is that the higher class in the United Kingdom would depart from London in favor of country estates during the summer, hence lowering the activity of investment portfolios.

What happens today?

Well, it is not uncommon for many people from the business and finance industry to go on summer vacations.

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Is Halloween strategy proved historically?

Historical returns indicate that the trend suggested in the Halloween strategy has been – at least for the most part – true throughout the last 50 years of so.

Furthermore, the sell-in-May strategy was historically successful in “beating the market” in over 80% of the time when used over a five-year horizon.

How did it perform when used in a 10-year horizon?

It’s success rates exceeded 90%.

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Conclusion of “sell in May and go away”

All this of course is not any sort of proof.

It can be a coincidence, some sort of irregularity and there might be some other explanation that we simply haven’t yet considered.

Moreover, the whole “timing” strategy is more commonly used by professional investors who follow technical analysis, since they have the resources to hold off trading for a year while holding the worth of the stocks in bonds or cash.

For most traders, returns can be high or low in any specific time during the year – assuming you know when to sell and when to buy, which of course, no one knows for certain.

Such traders might prefer to follow the theory behind fundamental analysis – focusing on market events and information and continue trading throughout the year.

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