Why is Halloween the best time to invest in the stock market?

(BFM Bourse) – Lovers of excitement and other thrills dare to take action on the eve of All Saints’ Day. Similar to the famous saying “sell in May”, the “Halloween indicator” implies that the period from November to April offers the greatest upside potential in the financial markets.

Candy and other sweets, a costume and a good horror film, here are the classic accessories for a good Halloween night. For investors, the kit comes with a well-chosen stock portfolio. Buying stocks on Halloween to sell them six months later generates an abnormally high performance, while the period from May to October mostly results in a performance, if not negative, at least significantly lower than the return on the risk-free assets.

The stock markets wouldn’t be the only ones haunted by the Halloween spirit, bitcoin has also advanced on every Halloween for the past three years.

A thorn in the side of the market efficiency hypothesis

The question may seem trivial, but it contradicts the core of modern financial market theory: the efficiency hypothesis, which wants no martingale to beat the indexes over time, that is, to register performances significantly above the long-term average. But many serious studies show that there is indeed a seasonal effect on the markets. What’s more – to the great chagrin of the researchers – it is not possible to explain why it is better not to intervene in the stock market from May, and to reinvest from the evening of 1 November.

A visible effect almost everywhere, almost all the time

Two academics, specializing in seasonal issues, tested the “Halloween/Sell in May” effect on the largest sample ever collected, and their conclusion is clear: investing on Halloween and taking profits in May returns 4% more than a strategy of holding one’s securities indefinitely. Professors Zhang Yi from Nottingham University Business School (China) and Ben Jacobsen from TIAS Business School (Netherlands) worked on nothing less than all available market data, a world first.

Their sample begins in 1693 with the London Stock Exchange and includes up to the latest of the indices, that of the Rwandan market inaugurated in 2013, i.e. 114 markets in total and more than 63,000 months of stock market performance to dissect… And the result is surprising in its scope, as they have identified only one market – the Mauritius Stock Exchange – that provides superior returns over time during the summer period. So over a rolling five-year period, an investor has an 80% chance of outperforming the market average by following a Halloween buying strategy and a 90% chance of doing better by sticking with it over ten years.

The effect of the summer vacation should outweigh the volume

The reason for this outperformance of the winter months around the world is therefore not entirely clear, although the historical spread of the UK market suggests a credible lead. It is also in the city’s reference daily newspaper that the oldest mention of the saying “Sell in May and go away” was noted – in a 1935 edition of Financial Times, the article already presents it as “an old saying”. The most likely hypothesis would be that the wealthy classes left London for the countryside on sunny days, leaving their purses behind (or at least intervened only occasionally during this period). The study by Zhang and Jacobsen assumes that this effect similar to holding summer vacations still works today. Especially since the seasonal variation of the Halloween indicator is more marked in Europe and the United States, where the habit of holidaying in the summer is more widespread than in the rest of the world.

After October, it’s time to return to the markets

Scientists are still puzzled: the Halloween effect has not been systematically exploited by arbitrage before it disappears. On the contrary, Zhang and Jacobsen note that it has tended to be emphasized over recent decades. The Halloween spirit is therefore not done haunting the markets, to the greatest benefit of investors…

Tradingsat Tradingsat – ©2022 BFM Bourse

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