Halloween indicator

The Halloween indicator is a variant of the stock market adage “Sell in May and go away,” the belief that the period from November to April has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash; stocks are bought again in the autumn, typically around Halloween. This Halloween indicator is partially related to another well known effect: The January Effect.


Though this seasonality is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom; it is strongest in Europe. According to the efficient-market hypothesis, this is impossible.


It is not clear what causes the effect. Many supporters of the Halloween indicator suggest that people taking vacations and holidays during the summer months can lead to market weakness. There are exceptions: between April 30 and October 30 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55).  We can not say the Halloween Indicator existed in each and every year. But that’s hardly surprising, since no indicator works all the time. The question is, over progressively longer horizons, does the success rate grew to very impressive and consistent levels (should be much higher than 50%).


Most interesting about the effect is that it shows that stock market returns in many countries during the period May-October are systematically negative or lower than the short-term interest rate, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short term interest rate (risk free rate).


Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show. However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade – especially May-October 2009 – these claims are often proved wrong.


One study which tests the Halloween indicator in US equity markets found similar results as Bouman and Jacobsen (2002) over the same time period but using futures data over the period April 1982- April 2003 and after excluding the years 1987 and 1998 no longer found a significant effect, leading these researchers to conclude that it was not an “exploitable anomaly’ during that time period in the United States.” Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant. The original saying is “Sell in May and go away, stay away till St. Leger Day”, referring to the last race of the British horse racing season, however this day is unlikely to be known by non-Brits so it is replaced by Halloween (which in turn is Samhain, about one-eighth year after the equinox).



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