What Is Halloween Effect?

Investors often look for strategies or scope to trade forex, stocks, commodities, and crypto assets. Over time, market users have devised many ways of trading and earning massive rewards, such as fundamental analysis, technical analysis, calendar anomalies, and so forth. These devised strategies have helped many investors play safe in the market and earn wisely from this global financial interface. Although investment is risky, acquiring the proper knowledge has proven to be the best antidote to a potential loss of funds. This article will treat a calendar anomaly called the “Halloween effect”.

Halloween Effect Defined

Every year, Halloween (or “Trick and Treat”) takes place on October 31. Meanwhile, the Halloween effect is a market anomaly that proposes higher stock returns from the 31st of October to the 1st of May. It is a strategy that preaches that investors should buy market assets in November and sell it off in April.

Sven Bouman and Ben Jacobsen curated the Halloween Indicator. In 2002, these Dutchmen wrote a book titled “The Halloween Indicator, ‘Sell in May and Go Away’: Another Puzzle” based on previous existing market behaviour. Investors can choose to invest in other assets when the Halloween season is over or hold their funds. The Halloween Effect is more profitable than the traditional buy-and-hold strategy.

The Origin of Halloween Strategy

This market strategy traces back to the 16th century in London, England. Local investors and newspapers often used the popular market adage called “Sell in May and Go Away.” The phrase became popular outside England after The Wall Journal published an article concerning the British stock market. Bouman and Jacobsen conducted a well-researched study on market returns from 1970 to 1998 to confirm the indicator. They found that there are higher market returns in the winter than in the summer. Research shows that the Halloween effect was more significant in the US market after the 1985 Financial Crisis. Out of the 36 countries studied, only Slovenia failed to have a more tremendous stock increase from November to April.

Reasons for Halloween Effect

Why does the market react to this ancient Celtic festival? Many analysts have proposed several reasons for the market behaviour in the winter. Yet, there is no agreed reason the market behaves in this manner. In 1970, Eugene F. Fama proposed the “Efficient Market Hypothesis”, or EMH, which states that “when new information comes into the market, it is immediately reflected in stock prices and thus neither technical nor fundamental analysis can generate excess returns.” In simpler terms, the EMH pronounces the market’s inability to be predicted using strategies like the Halloween Effect.

The suggested reasons why the Halloween Effect occurs include news, data mining, risk, the January effect, interest rates, trading volumes, sectors, and vacations. In fact, the curators of the Halloween Indicator carried out several investigations as regards the actual cause of the difference in returns between the winter and summer seasons. At the end of a series of investigations, they concluded on the widely accepted reason for the Halloween Effect. Many agree that the most tenable reason was the timing and duration of professional investors’ summer vacation. The absence of these investors in the stock markets of several countries during the summer affects the stock market’s liquidity significantly.

Evidence of the Halloween Effect

To prove the authenticity of the Halloween effect thesis, analysts examined major stocks across different countries. There are several pieces of evidence to show the Halloween Effect. Over the past 30 years, the US market has continually maintained bullish positions. One may suggest that using the buy-and-hold strategy in the US market is more profitable than the market-timing method. However, the Halloween Effect has proven to be the better option. Halloween Effect proved this on S&P 500, backdating its market reaction to 1985. For instance, if an investor follows the Halloween strategy by buying S&P 500 in November and selling it in April. After pulling out the invested funds, the investor deposited the fund into another asset, like a 13-week T-bill during the next six months. The average annual return for this investor is 10.85% compared to the buy-and-hold investor, who gains 9.93%. The slight difference in the returns could be an excellent reward for the wiser investor.

Does Halloween Effect Impact Crypto?

For a long period, the cryptocurrency sector seems to be immune to the Halloween strategy. However, a spectacular change occurred in the crypto sector in 2015. The bearish season of the crypto market suddenly ‌ceased on October 31. Thereafter the market experienced a bullish run till May 2016. Crypto assets increased by 41% during the duration. This was just the tip of the iceberg of what was coming. During the next Halloween season which took place from October 31, 2016, to May 1, 2017, Bitcoin (BTC) price surged. This mouth-watering rise gave investors over 117% in returns. On the 31st of October, 2022, the price of BTC rapidly increased to $20,000. Unfortunately, the price plummeted to $5,800. In 2018, Bitcoin increased by over 52% compared to the previous Halloween.

Apart from the world’s first cryptocurrency, other crypto assets have reacted to the Halloween Effect. Some other cryptocurrencies also recorded massive gains during the Halloween season. In 2020, Ethereum (ETH), Bitcoin’s rival, registered an increase of 206%, while Cardano had a peak return of 291%. The compliance of the cryptocurrency behaviour to the Halloween strategy is remarkable and monumental.

Halloween Effect 2022

Many investors have their fingers crossed on this year’s Halloween season, especially crypto investors. Many crypto folks expect a sudden price rise in the prolonged bearish season. Bitcoin has consistently obliged to the Halloween Effect in the past three years. Investors expect the mysterious indicator to resurrect the plummeting price of stock, futures, commodities, and crypto assets. Many investors are ready to dump their funds in their preferred stock and go on vacation, as proposed by the widely accepted theory. The Halloween Season for 2022 runs from October 31 to May 1, 2023.

Final Thoughts

The Halloween effect is a mysterious and essential tool needed by investors. Although the efficiency is still questionable, it is a key determinant of the bullish season. Researchers have subjected the Halloween Effect to tests across different countries and sectors of which the indicator has performed excellently above average. Above all, investors must invest in other risk-free assets during the six months outside the Halloween season. Without mincing words, Halloween Effect or Halloween strategy has remained a trusted and tested superstition. Newbies can use the indications independently with no confluence from other indicators.