The Halloween effect: why you should be prepared to buy stocks in November


Investors shouldn’t be afraid of Halloween. Now is the perfect time to buy stocks.

Research shows that the stock markets exhibit significant seasonality and that they always perform best during the winter months.

The old adage “sell in May and go” has been around for decades. He recommends that investors follow a strategy of selling stocks at the beginning of May and not to buy back in the market until the beginning of November.

Many have derided the theory over the years as an old wives tale and tried to refute it. But two new academic research has confirmed that the Halloween effect, as it is also called, is very real and is a very reliable trading strategy to boot. Don’t ask anyone to explain why it works.

In the largest study of its kind, Ben Jacobsen, professor of finance at TIAS Business School in the Netherlands, and Cherry Zhang of Nottingham University Business School China analyzed the monthly returns of the world’s 114 stock markets, going back more than 320 years old.

The study found that, on average, the stock markets rose 5.1%, or 0.85% per month, from November to April, compared to just 1.1%, or 0.18% per month, between May and October.

The highest average yields were evident in 89 of 114 countries, and the statistically significant difference in 42 of those countries, compared to a single country, Mauritius, which had significantly higher yields for May-October.

The effect is truly global and most pronounced in Europe, North America and Asia.

The reliability of the Halloween effect is also remarkable and Jacobsen and Zhang said that it has increased over the past 50 years. It’s such a powerful trend that it trumps short-term concerns, such as the outcome of a US presidential election or declines in GDP growth.

The pair showed that in the UK, for example, over a five-year horizon, the strategy of buying in November and selling in April beat the market 80% of the time. In 10 years, the probability of beating the stock market has increased to 90%.

“Overall, our evidence suggests that the Halloween effect is a strong market anomaly that has strengthened rather than weakened in recent years. In summary, what we can say for sure is that the Halloween effect is alive and well, ”the pair added.

This research is not an outlier

Jacobsen and Zhang’s study, which is due for publication in the Journal of International Money and Finance next February but can now be viewed online here, is certainly eye-catching. The results were very similar to what the couple found in a previous study they conducted in 2012.

This, in turn, drew on research Jacobsen conducted with Sven Bouman, now CEO of Dutch fund manager Saemor Capital, in 2002. This revealed the trend present in 36 of the 37 countries examined, and this was supported by d other work by Jacobsen & Visaltanachoti in 2009 and Grimbacher, Swinkels & van Vliet in 2010.

However, there have been many opponents over the years. Academic theory says the Halloween effect shouldn’t work. The efficient market hypothesis, a cornerstone of finance textbooks, says that asset pricing reflects all known information. Thus, anomalies like the Halloween effect, both known and highly predictable, should quickly disappear.

Many academics have tried to disprove the Halloween effect over the years. Jacobsen and Zhang said they updated and expanded their previous research to expand the dataset and counter any accusations of sample selection bias skewing the results.

A separate study this year by four academics from universities in South Africa, Ukraine and the UK, published in International Economics, aimed to prove that statistical quirks were behind the results.

What their tests actually found is that although the trend is “impossible under the assumption of an efficient market”, it is real and “continues to provide opportunities to build a trading strategy that can beat. the market”.

Similar studies aimed at explaining the effect by identifying problems with the methodology used, such as the Maberly & Pierce articles in 2003 and 2004, were also rejected. Jacobsen and Zhang were just too complete and their dataset too complete for their conclusions to be dismissed in this fashion.

But for all the academic studies conducted on the Halloween effect, no one has ever been able to provide a satisfactory explanation of why this happens.

Theories of the past, such as decreasing trading volumes during the holidays, macro announcements and corporate news schedules, or seasonal changes in our mood, have all been debunked.

It is perhaps normal for the Halloween effect to retain an air of mystery.



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