We’ve written extensively about the “Sell in May and Walk Away” effect, in which an understandable human behavior—taking some summer vacation — has a global financial impact. The other half of lower returns during summer is the higher returns during winter. This has been a well-documented phenomenon for a number of years. A detailed October 2012 study (PDF) by Ben Jacobsen and Cherry Yi Zhang of Massey University in New Zealand studies how the Halloween Effect has become even stronger in recent years, especially in developed-country markets.
The authors make a compelling case that trading in a way that makes use of the Halloween Effect can yield better returns than a standard buy-and-hold strategy based on the market’s overall performance, which you might trade by investing in an index fund or ETF.
[quote]Overall, our evidence suggests that the Halloween effect is a strong market anomaly that has strengthened rather than weakened in the recent years. [/quote]
Remember that summer in the markets is not the summer of the school year. It lasts from April to October (don’t tell the kids). Halloween marks the end of that period. It also marks a number of economic factors, like heating oil orders, grain price forecasts for the following spring, and this year, a possible tapering of quantitative easing. It’s an open debate whether these are correlation or causation. And whether the Halloween Effect is a calculated, rational response to economic factors or just a self-fulfilling prophecy is an open debate, too.
Either way, it’s likely to occur, at least for a while, and traders should be aware of it, whether they trade off of it or not.