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A study titled "Halloween Indicator: Sell in May and Go Away – Anytime, Anywhere" finds that the Halloween effect is a strong and persistent phenomenon across global stock markets.

Key Findings:

• Halloween Effect: The average stock market return from November to April (winter) is 4% higher than from May to October (summer).

• Risk-Return Relationship: During the summer months, the risk-return tradeoff is weak, contradicting traditional asset pricing theories.

• Global Data: A 323-year dataset dispels concerns of data mining.

• Widespread Occurrence: The Halloween effect is observed in 63 out of 65 analyzed markets.

• UK Market: The Halloween strategy has consistently outperformed a buy-and-hold strategy in the long term.

• Stock Premium: The new upper bound for stock market premiums is 4%.

• Robustness: The Halloween effect persists beyond sample periods and cannot be explained by outliers or data measurement frequency.

• Vacation Hypothesis: The most plausible explanation for the effect is investor behavior related to seasonal vacations.

• Investment Strategy: The Halloween strategy has a high probability of outperforming the market.

• Sample Size Impact: A small sample size makes it harder to detect the Halloween effect.

• Psychological Factors: Seasonal affective disorder or temperature changes do not significantly impact stock returns.

• Methodology: Using a six-month dummy variable does not affect the statistical significance of the results.

Comparison: Halloween Strategy vs. Buy-and-Hold

• Returns: The Halloween strategy outperformed buy-and-hold in 30 out of 37 markets.

• Volatility: The Halloween strategy tends to have lower standard deviation, indicating lower risk.

• Sharpe Ratio: The Halloween strategy generally has a higher Sharpe ratio, meaning better risk-adjusted returns.

• UK Market: Since 1693, the Halloween strategy has consistently outperformed buy-and-hold over 50-year and 100-year subperiods.

• Bias Toward Gains: The Halloween strategy generates more extreme positive returns while producing fewer extreme losses than buy-and-hold.

• Long-Term Investment: This strategy is particularly useful for investors with a horizon of 5 years or more.

Considerations and Limitations:

• The 4% return premium for winter months is an average and may not appear in all market conditions.

• Small sample sizes may make detecting the Halloween effect more challenging.

• The strategy’s effectiveness depends on market conditions and is not guaranteed to always generate positive returns.

Conclusion

The Halloween strategy has historically delivered higher risk-adjusted returns than buy-and-hold, making it a compelling alternative for investors. However, investors should consider their goals, risk tolerance, and market conditions before adopting this seasonal approach.

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• Core16 may hold positions in the stocks mentioned in this post and may buy or sell them at any time.