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Trick or Treat?

Halloween and Seasonality Strategy

Halloween comes once a year on October 31st. It is now the second most popular holiday in the United States (just after Christmas) for decorating and for total retail spending (i.e., sales of candy and treats).

The Halloween indicator is an investment strategy based on the theory that stocks tend to perform much better between October 31st (Halloween) and May 1st than the following six months from May through the end of October. It is the opposite of the “Sell in May and Go Away” strategy where investors divest their stock holdings in May and wait to reinvest in stocks starting in November.

The notion of abandoning stocks in May originated overseas, namely in the United Kingdom, where the privileged would leave London and head to the country for the summer, only to return in September. Today, in the U.S. and other major financial centers it is common for traders, money managers, financial advisors, and other investment professionals to leave their urban dwellings during the summer in favor of their country houses in the Hamptons in New York, Nantucket in Massachusetts, and equivalent summer resorts elsewhere.

Although investors are told not to time the market, the superior returns in U.S. stock market indexes during the six consecutive months period from November to May is astonishing. The Halloween indicator states that it may be worthwhile for investors to be more aggressive (take more stock risk) by buying stocks starting in November, holding these positions through the winter months, then sell in April, while investing in other more defensive investments (i.e., fixed income and total return securities) from May through October. Some even recommend not to invest in the stock market during the low liquidity and lackluster periods of the summer months.

Performance of the Strategy over the past 20-years

The Halloween strategy or indicator does have supporting evidence that the months between November and April have provided investors with strong returns than any other month of the year. The best 6-month Halloween strategy returns come from the S&P 400 Mid-Cap Index (MID) accounting for 90.70% of the yearly return. The weakest 6-month returns come from the Nasdaq Composite Index (COMPQ) where it accounts for 55.56% of the yearly return. Also, included are the 6-month statistics for selling stocks in May and reinvesting in November over the past 20-years.

Attached below are the seasonality returns of key market indexes including the S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), Nasdaq Composite Index (COMPQ), S&P 400 Mid Cap Index (MID), and the Russell 2000 Small-Cap ETF (IWM).

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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