What Is the Halloween Strategy?

The Halloween strategy, Halloween effect, or Halloween indicator, is an investment strategy based on the theory that stocks perform better between October 31 (Halloween) and May 1 (“winter” months) than they do between the beginning of May through the end of October (“summer” months).

The theory posits that it is prudent for investors to buy equities in November and hold them through April, while investing in other asset classes from May through October. Some who subscribe to this tactic say not to invest at all in the summer months. This technique is contrary to the buy-and-hold strategy, in which an investor may ride out down months, and seems to contradict the premise of the Efficient Markets Hypothesis.

Key Takeaways

  • The strategy includes being fully invested in stocks from November through May, and out of stocks from June through October.
  • Variations of this strategy and its accompanying axioms have been around for over a century.
  • There is evidence that this strategy does perform well over several years, but no one has offered a satisfactory explanation for why it works.

Understanding the Halloween Strategy

The Halloween strategy is closely related to the oft-repeated phrase, "sell in May and go away." It is worth noting that some variation of this strategy has actually been around quite a long time. The axiom so often coined in financial media was also repeated over the last two centuries, and its longer version was some variation of these words: Sell in May, go away, come again St. Leger's day (September 15th).

Many believe that the notion of abandoning stocks in May of each year has its origins in the United Kingdom, where the privileged class would leave London and head to their country estates for the summer, largely ignoring their investment portfolios, only to return mid September. Those who subscribe to this notion would likely expect that it is common for salesmen, traders, brokers, equity analysts, and others in the investment community to leave their metropolitan financial centers in summer in favor of oases like the Hamptons in New York, Nantucket in Massachusetts, and their equivalents elsewhere.

However, Sven Bouman and Ben Jacobsen published a paper in the American Economic Review that specifically studied the performance of stocks during the period from November to April and dubbed this the Halloween Indicator. In their observation, an investor who would use the Halloween strategy to be fully invested for one six-month period and be out of the market for the other six months of the year, would theoretically reap the best part of an annual return, but with just half the exposure of someone who invests in stocks year-round. 

Performance of the Strategy

The Halloween strategy does have evidence worth of consideration. Historical returns suggest that the premise of the Halloween strategy has been mostly true throughout the past-50 years—that the months between November and April actually have provided investors with stronger capital gains than have the other months of the year. Results also show that a sell-in-May strategy is successful in beating the market more than 80 percent of the time when employed over a five-year horizon, and more than 90 percent successful in beating the market when used with a 10-year horizon.

The graph below displays the Halloween effect for U.S. stocks for the comparable periods 1970–2017 and 1991–2017. It indicates that the return on the Standard & Poor’s 500 Index (S&P 500) is much higher from November through April than it is between May and October.

Halloween Effect

What Causes the Halloween Effect?

No one has been able to conclusively identify a reason for these figures. While many market watchers believe that investment professionals’ summer vacations do have an impact on market liquidity, or that investors’ aversion to risk during the summer months is at least partly responsible for the difference in seasonal returns, these notions assume that increased participation means increased gains. But market crashes and similar investing disasters are attended by the highest levels in volume and participation, so the assumption of increased participation may have some correlation with gains, but it is not likely to cause the gains.

Electronic trading allows participants all over the world to participate as easily from the beach as from the boardroom, so proximity to trading resources is not likely to be an explanation either. There is no dearth of theories to support whatever one wants to believe about the Halloween strategy. For as many different opinions as there are about the Halloween effect, there are an equal number of theories to support those opinions. The Halloween strategy is fascinating for the very reason that it is both an empirical anomaly as well as a mystery.