What is Halloween strategy?
In this strategy, investors sell at the start of May and come back into the market only after Halloween, which falls on October 31 every year. This strategy is heavily based on the concept of seasonality, specifically, those stocks which perform better in the winter months than they do in the summer months.
Will this strategy work in India?
- Historical data suggests, in last 20 years, 75% of the times year-end returns from May lows has been positive.
- Since 1990, the index has fallen in only 12 instances while it has risen in 18 instances, giving an average return of +0.67%. But in all 12 instances when the markets fell in May, the markets had risen 13% on an average.
What factors could impact the market?
- Higher crude oil prices: As per the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) report, an increase in the oil price by $10 per barrel would bring down GDP growth by 0.2-0.3 percentage points, quicken inflation by about 1.7 percentage points and worsen the current account balance by about $9-10bn.
- Fear of rising interest rates by RBI.
- The Karnataka election verdict (results on May 15).
Halloween strategy is more popular in the US, where various studies in the past validated the thesis to be in line with the historical returns. In India, seasonality clearly favors buying in May and therefore the investors should use this strategy as an opportunity to accumulate quality stocks in a staggered manner and use the far month "Delta Neutral Strategy ".