Halloween Strategy: What It Means, How It Works

What Is the Halloween Strategy?

The Halloween strategy is a market timing strategy. It is based on the hypothesis that stocks perform better from Oct. 31 (Halloween) to May 1 than the rest of the year. The Halloween strategy posits that it is prudent to buy stocks in November, hold them through the winter months, and sell them in April while investing in other asset classes from May through October.

Understanding the Halloween Strategy

As noted above, the Halloween strategy aims to capitalize on gains by timing the stock market. It refers to a tactic where investors buy stocks in November and sell them in April. Investors who subscribe to this theory typically choose defensive stocks and assets after they've sold their stocks, which is during the summer months.

The idea that investors can time the market is contrary to the buy-and-hold strategy, in which an investor may ride out down months, and invest for the longer term. The superior results seem to contradict the premise of the efficient market hypothesis and that stocks behave in a completely random manner.

This strategy is closely related to the oft-repeated advice to sell in May and go away. Some variation of this strategy has been around for quite a long time. The axiom that was often coined in financial media was also repeated over the last two centuries, and its longer version was some variation of these words: Sell in May, go away, come again, St. Leger Day.

Special Considerations

Many believe that the notion of abandoning stocks every May began in the United Kingdom, where the privileged class would leave London and head to their country estates for the summer, largely ignoring their investment portfolios, only to return in September.

Those who subscribe to this notion would likely expect that it is common for salesmen, traders, brokers, equity analysts, and others in the investment community to leave their metropolitan financial centers in summer in favor of oases like the Hamptons in New York, Nantucket in Massachusetts, and their equivalents elsewhere.

Sven Bouman and Ben Jacobsen published a paper in the American Economic Review that specifically studied the performance of stocks during the period from November to April and dubbed this the Halloween Indicator. In their observation, an investor who uses the Halloween strategy to be fully invested for one six-month period and out of the market for the other six months of the year would theoretically reap the best part of an annual return, but with just half the exposure of someone who invests in stocks year-round.

Halloween Strategy Performance

The Halloween strategy does have evidence worthy of consideration. Historical stock returns suggest that the premise of the Halloween strategy has been mostly true—that the months from November through April have provided investors with stronger capital gains than have the other months of the year.

Results also show that selling in May is successful in beating the market more than 80% of the time when this strategy is used over a five-year horizon. It is more than 90% successful in beating the market when used within a 10-year time frame.

The graph below displays the Halloween effect for U.S. stocks for the comparable periods from 1970 to 2017 and 1991 to 2017. It indicates that the return on the Standard & Poor’s 500 (S&P 500) is much higher from November through April than it is from May through October.

What Causes the Halloween Effect?

No one can conclusively identify a reason for this seasonal anomaly. While many market watchers believe that the summer vacations of investment professionals impact market liquidity or that investors’ aversion to risk during the summer months is at least partly responsible for the difference in seasonal returns, these notions assume that increased participation means increased gains.

But market crashes and similar investing disasters are attended by the highest levels in terms of volume and participation. Therefore, the assumption of increased participation may have some correlation with gains, but it is not likely to cause the gains. Proximity to trading resources is not likely to be an explanation, either, as electronic trading allows investors all around the world to participate—as easily from the beach as from the boardroom.

There is no dearth of theories to support whatever one wants to believe about the Halloween strategy. For as many different opinions as there are about the Halloween effect, there is an equal number of theories to support those opinions. The Halloween strategy is fascinating for the very reason that it is both an empirical anomaly and a mystery.

The Bottom Line

The Halloween strategy suggests that investors should buy stocks in November and hold them until April when it's time to sell them off. Although research shows that there is some truth to the theory, investors should remember that it's just that—a theory. Whether you call it the Halloween strategy, Halloween effect, or Halloween indicator, do your due diligence and research before adopting any investment strategy.