Retirement Investing Strategies and Articles

What is the Halloween Indicator?

by Retirement Tips

Nov 20, 2022

The stock market and the community of investors and money managers who invest in the capital markets have a number of axioms, sayings and maxims around investing and the markets.

Some prove to be true through market cycles, some have lost their previous luster and others are relics of the past. Despite the uncertainty troubling some, many investors base decisions on these timeless old adages.

One of those market philosophies or adages is the “Halloween Indicator,” the “Halloween Effect”, or the “Halloween Strategy.”

The idea behind the strategy is that globally, stocks tend to produce higher returns during the six-month period beginning November 1 to the end of April of the following year. Because this time period occurs just after Halloween; the name stuck.

Most investment professionals agree that market timing does not work, but the Halloween Indicator has proven to be reliable and has broad support among those in financial services.

As stated, this rule applies globally to stocks. Some studies have found, in a look back historically at markets around the world, that the technique has worked better than a simple buy and hold approach.

The approach is often summed up in the famous adage; “sell in May and go away.” Except, you are not entirely going away; you are returning to the market after Halloween.

In light of the fact that complex market timing strategies have mostly proven fruitless, this simple calendar approach has been surprisingly successful.

Exceptions; but a Safe Harbor from Volatility

During 2022, the advice would have saved investors some volatility and losses during that period.

On April 29, 2022, the S&P stood at approximately 4,132. By June 17, it had fallen to 3,675, and while it rose again to 4,305 by August 16, it took another tumble to 3,577 by October 12. Investors who were out of the market, would have avoided this roller-coaster ride. Through
the end of October, the S&P is down around 19 percent.

The NASDAQ also fell from the first of May through late in the month before a surge in late May and early June, before falling again starting June 8. There was another drop starting in mid-August that lasted until early October with a few brief rallies in-between. Again, those who had moved out of equities would have avoided a lot of volatility. The index has been off by 30 percent through late October.

The same could be said of the Dow Jones Industrial Average, which saw a substantial drop from mid-August through late September with only a brief rally. The only divergence from the strategy for 2022 is that both the S&P and the Dow began a rally around October 11th.

The strategy may be impacted in 2022 by the intervention of the Federal Reserve with aggressive interest rate increases. The same can be said of 2021, when the time period contained within the Halloween Indicator, saw the S&P 500 drop 10.3 percent.

While not accurate 100 percent of the time, the approach has been successful 75 percent of the time. Besides the fact that the strategy doesn’t bat 100, there are also the tax implications to weigh. Stocks held for less than a year can produce a larger tax bill.

Only time will tell and the Halloween Indicator will be put to the test once again in the months ahead.

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