Ghosts, Monsters, Ghouls and Stocks: Is the Halloween Strategy a Ghost Story?

Highlights

• To some investors, the Halloween strategy is gospel.
• The strategy became popular again in the 1980s when The Wall Street Journal wrote a piece on the British stock market. 

Gather around the torchlight for this is a story century old which must be told in a deathly whisper and to those who absorb it, they have the choice to employ it and wait and see whether or not portfolio enjoys it. This is the Halloween strategy.

To many people, October 31 means Halloween, costumes, spooky decorations and candy. Lots of candy. Dentists are a big fan of Halloween for this very reason. For in the aftermath of Halloween, parents arrive at the dentist’s office, children in tow with a mouth full of rotting teeth like an exhumed corpse. If you look at any dentist’s calendar, October 31 will have dollar signs emphatically written into it with a sharpie.

Another group of people who see dollar signs on October 31, are a particular set of stock investors who subscribe to the Halloween strategy.

It’s important to have some kind of strategy when investing in the stock market. But does the Halloween strategy consistently pay off? Or is the premise this strategy is based on flawed? Let’s jump in and don’t forget to hold on tight!

What Is the Halloween Strategy?

The Halloween strategy is based on the premise that the stock market performs better from October 31 to May 1. Therefore, the Halloween strategy is to buy stock on October 31 or in the month of November and sell by May 1. From May 1 to October 31, investors who subscribe to this strategy either put their money into another asset class or leave their money dormant for those six months.

Ghosts, Monsters, Ghouls and Stocks Is the Halloween Strategy a Ghost Story

Like stories of grizzly ghouls and fanged, hairy monsters, some may dismiss the Halloween strategy as hokum. Nothing more than a fanciful tale told by a shifty soothsayer. But to some investors, the Halloween strategy is gospel.

The Ominous Origins

Although this strategy – which eventually became known by the mantra, Sell in May and go away - originated in the 16th century in London, England, it became popular again in the 1980s when The Wall Street Journal wrote a piece on the British stock market.

The mantra Sell in May and go away would begin to be chanted by investors in the lead up to October 31 as they devoted themselves to the idea that November to May would typically be a bull market.

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Does This Spell Work?

The question of whether the Halloween strategy is legitimate has lot to do with the validity of the Efficient Markets Hypothesis. This hypothesis states that there should not be any over-aching strategy whereby investors can consistently profit. This includes The Halloween strategy. The reason is, if such a strategy did work, all investors would exploit the strategy through arbitrage.

However, in a study conducted by The American Economic Review, 36 of the 37 markets examined did in fact find that equity securities generated greater returns from November to April.

This finding can potentially be explained by higher risk in that period, which comes as a result of a calendar time anomaly. Moreover, shifts in interest rates, trading volume, and stock returns can sometimes be lower from May to October period due to seasonal factors in the news.

Chief U.S. equity strategist at Credit Suisse, Jonathan Golub told CNBC earlier this year that any investment strategy that can be summarised in a rhyme scheme is probably not one that should be soundly relied upon.

He added that the Halloween strategy might have more validity if each May’s market performance looked the same as the previous May’s but, alas, this is not the case. Source

Halloween Strategy: Truth of Myth?

And so like the existence of ghosts or Bigfoot or Jeff Bezos’ hair, the Halloween strategy remains largely mythical, in that many have claimed it exists, but who amongst us has actually seen it?