Halloween Startegy Explained
Halloween has its significance as a celebration with costumes on October 31. However, this period also has some importance for stock market investors It stands out as the Halloween period, which starts from October 31 to May 1. It is believed that the Halloween period can be better than any other period for making capital gains.
This belief is based on the historical data indicating that stock are favourable for earning profits during this period.
But, what is the Halloween strategy?
This blog analyses the Halloween strategy definition and explains the Halloween strategy meaning.
Investors started following the Halloween strategy a period between the years 1694 to 1776.
The Halloween strategy is a “sell in May and Walk away” approach, which is based on the Halloween indicator of capital gains.
It suggests the Halloween period as an appropriate time for investing. Investors believe that the gains during the Halloween period could get as high as 80 per cent. It also says that during the other six months, from May to October, investors should refrain from investing in the stock market.
How does the Halloween strategy work?
This strategy originated in England. Here, the elite class investors used to go on summer vacation from May till the Halloween festival. During this period, they used to leave their stocks and estate unattended and made no new investments. This practice was prevalent during the period between 1694 and 1776.
Due to the lack of activity (buying and selling) in the stock market, the stock prices would fall during this period. With the fall in stock prices, the market would plunge. Therefore, it was difficult to sell stocks and make profits for the six months between May to October.
That is why the idea of selling off one’s stock market investment and then going for the summer vacation (walking away) prevailed in those times.
What is the reason behind the Halloween anomaly?
Many popular theories support and equally popular theories that stand against the Halloween strategy.
Though this strategy is based on data, there are no hard facts stating the reason for the stock market figures during this period. The historical data attests to the fact that the stock market performs better for the period between November to April than during the other six months of the year.
A few reasons considered are the summer vacation of investors giving lesser priority to their portfolio.
The Halloween strategy meaning is based on the notion that the market rises with the increased number of investors. However, the investors can gain or lose from such an event.
Consider that there is an increased investor activity during the Halloween period. During this time, there was a severe market crash. With the increased amount of investor activity, the sell-offs might increase, further declining the market prices.
Therefore, there are advantages and disadvantages of following the Halloween strategy.
What are the advantages of following the Halloween strategy?
The Halloween strategy is essentially a “buy and hold” strategy for investors looking to rebalance their portfolio or earn short-term profits.
Historical data is the basis of the Halloween strategy. During this period between November to April, investors have made more capital gains or profits than in the other six months. Investors following this strategy can restructure and rebalance their portfolios in November every year. By taking advantage of economic booms, they can manage their investment risk.
Therefore, based on the historical evidence, the investors can follow the cycle of stock market upswings and plunges. Furthermore, it can be a good tool for market tracking and performance forecasting.
What are the disadvantages of following the Halloween strategy?
Some of the disadvantages of the Halloween strategy include:
- This strategy was developed during a period when economic activity was slow and there were fewer investors in the market. That is why it was possible to ascertain the short-term movements of the investors. With a lot of investors existing in the market, this theory might not have much relevance.
- Investors following the Halloween strategy without considering the current economic conditions might fall prey to unforeseen risks.
- In case of uncertainties, investors might have to wait for the favourable Halloween period to convert their investments into cash.
- There are chances that the stock price might not go as high as the strategy states. The returns might not meet the expectations of the investors. This is mainly because of a higher proportion of investors booking profits and thus bringing the stock price down.
- Economic booms might occur irrespective of the Halloween period. Therefore, investors waiting to redeem investments through the Halloween strategy might miss out on these booms.
- With the emergence of global relations, markets might be impacted due to the contagion effect of events happening in the different parts of the world and not just domestically. Therefore, the Halloween strategy might have a lesser significance.
The Halloween strategy has been used by investors around the world for a long period. The existence of the Halloween period and the stock price booms during this period can also be proved by the historical stock market data. However, investors must be rational and consider the then economic conditions before planning to convert their stocks into cash. By doing this, investors can stay clear of biases and make sound investing decisions. Investing using the Halloween strategy can benefit if followed with caution and without bias.