Is it time to buy the Halloween Effect?
The Halloween Effect in US Sectors:
All US stock market sectors and industries perform better during winter than during summer in our sample from 1926-2005. In more than two-third of all sectors and industries this difference in summer and winter returns, known as the Halloween effect, is statistically significant and in half of all sectors and industries risk premia are negative during summer. However, while all sectors and industries show this effect, there are large differences across sectors and industries. The effect is almost absent in sectors related to consumer consumption but strong in production sectors. We illustrate how these differences between sectors might be used to improve the risk return trade off using sector rotation based on Fidelity sector funds and show how an investor might have benefited from such a trading strategy.
The Halloween Effect and Japanese Equity Prices: Myth or Exploitable Anomaly?
Bouman and Jacobsen (2002) examine monthly stock returns for 37 world stock markets for the period January 1970-August 1998. They report that returns are significantly higher during the November-April periods versus the May-October periods in 36 of 37 markets examined and label this phenomenon the Halloween puzzle. These results conflict with those predicted by the efficient market paradigm. Using United States monthly return date, Maberly and Pierce (2004) report that, in terms of statistical significance, the Halloween puzzle is not robust to alternative model specifications. In particular, after adjusting for the October 1987 Crash and the August 1998 failure of Long-Term Capital Management, the Halloween puzzle becomes statistically insignificant at a meaningful level.
We discovered that those best days on average are October 16 for the entry into the market for its favorable seasonal period, and April 20 for the exit from the market’s favorable season. However, those are just the best days as averaged over a very long time period. Obviously the market does not begin a rally on the same day each year, or begin to decline from a top on the same day each year. So we then concentrated on determining a means by which the entries and exits could be more accurately pinpointed as they change each year.
The strategy uses MACD to time entries and exits.
This paper claims the Halloween Effect is simply due to a few "outliers," and Efficient Markets are safe:
On re-examination, the documentation of a Halloween effect in the U.S. disappears after an adjustment is made for the impact of outliers, in particular the largemonthly declines for October 1987 and August 1998 associated with the stock market crash and collapse of the hedge fund Long-Term Capital Management, respectively. For the U.S., the empirical evidence indicates that the Halloween effect is not an exploitable anomaly, and this is true for both spot and futures prices. However, in bear market years there exists anecdotal evidence that most of the negative decline in equity prices occurs during the May-October periods.
From SafeHaven:
According to the Stock Trader's Almanac, if you invested in the Dow from November through April, and switched to fixed-income investments from May to October, over a 54-year period (1950-2004), your returns would have been quite dramatic. Using this strategy, a $10,000 investment in the Dow compounded from 1950-2004 produced a $492,060 gain in the November - April period, versus a loss of $318 for the May-October period.
Hmmm, you decide, but have a Happy Halloween!
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