Why is Halloween the best time to invest in the stock market?

Why is Halloween the best time to invest in the stock market?

(BFM Bourse) – Lovers of thrills and other thrills dare to spring into action on the eve of All Saints’ Day. Corresponding to the famous adage “sell in May”, the “Halloween Indicator” implies that the period from November to April offers the greatest upside potential in the financial markets.

Candy and other sweets, a costume and a good horror movie, here are the classic paraphernalia for a good Halloween night. For investors, the kit comes with a well-chosen stock portfolio. Buying shares on Halloween and selling them six months later generates an abnormally high return, while the May-October period most of the time results in a return, if not negative, at least significantly below the return on assets. Risk free.

The stock markets would not be the only ones haunted by the spirit of Halloween. Bitcoin has also made progress on every Halloween for the last three years.

A thorn in the side of the market efficiency hypothesis

The question may seem trivial, but it contradicts the heart of modern financial market theory: the efficiency hypothesis, according to which no martingale would outperform the indices over time, that is, outperform significantly. long term average. However, many serious studies show that there is in fact a seasonal effect in the markets. What’s more – to the great annoyance of the researchers – it is not possible to explain why it is better to refrain from intervening in the stock market from May, and reinvest from the eve of November 1.

An effect visible almost everywhere, almost all the time

Two academics, specialized in seasonal issues, tested the “Halloween/Sell in May” effect on the largest sample ever collected, and their conclusion is clear: investing in Halloween and making a profit in May generates 4% more than a strategy of keep its values ​​indefinitely. Professors Zhang Yi from the University of Nottingham Business School (China) and Ben Jacobsen from the TIAS Business School (The Netherlands) worked with nothing less than all available market data, a world first.

Its sample begins in 1693 with the London Stock Exchange and covers up to the most recent of the indices, that of the Rwandan market inaugurated in 2013, that is, 114 markets in total and more than 63,000 months of stock market evolution to dissect… And the result is surprising in its scope, as they have identified a single market, the Mauritius Stock Exchange, that outperforms over time during the summer period. Thus, over any five-year rolling period, an investor has an 80% chance of outperforming the market average if they follow a Halloween buying strategy, and a 90% chance of outperforming the market average. sticks to it for ten years.

The effect of the summer holidays should weigh on volumes

Therefore, the reason for this outperformance of the winter months around the world is not entirely clear, even if the historical prevalence of the UK market suggests a credible advantage. It is also in the reference newspaper of the City where the oldest mention of the saying “Sell in May and go” is recorded -in a 1935 edition of the financial times, the article already presents it as “an old adage”. The most likely hypothesis would be that the wealthy classes left London for the countryside on sunny days, leaving their wallets behind (or at least intervening only occasionally during this period). Zhang and Jacobsen’s study assumes that this effect of taking summer vacations is still present today. Especially since the seasonality of the Halloween Indicator is more marked in Europe and the United States, where the custom of taking vacations in summer is more widespread than in the rest of the world.

After October, it’s time to return to the markets

It remains a puzzle for researchers: the Halloween effect has not been systematically exploited by arbitrageurs until it wears off. On the contrary, Zhang and Jacobsen observe that it has tended to become more pronounced in recent decades. The spirit of Halloween, therefore, has not finished haunting the markets, to the benefit of investors…

Tradingsat Tradingsat – ©2022 BFM Bourse

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