Halloween indicator
Encyclopedia
The Halloween indicator is a variant of the stock market
adage "Sell in May and go away," the belief that the period from November to April inclusive has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween
.
Though this seasonality
is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom
; it is strongest in Europe. According to the efficient-market hypothesis, this is impossible.
It is not clear what causes the effect.
Most interesting about the effect is that it shows that stock market returns in many countries during the period May-October are systematically negative or lower than the short-term interest rate
, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short term interest rate (risk free rate
).
Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show. However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade - especially May-October 2009 - these claims are often proved wrong.
That said, between April 30 and October 30 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55)
One study which tests the Halloween indicator in US equity markets found similar results as Bouman and Jacobsen (2002) over the same time period but using futures data over the period April 1982- April 2003 and after excluding the years 1987 and 1998 no longer found a significant effect, leading these researchers to conclude that it was not an "exploitable anomaly' during that time period in the United States." Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant.
The original saying is "Sell in May and go away, stay away till St. Leger
Day", referring to the last race of the British horse racing season, however this day is unlikely to be known by non-Brits so it is replaced by Halloween (which in turn is Samhain
, about one-eighth year after the equinox).
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
adage "Sell in May and go away," the belief that the period from November to April inclusive has significantly stronger growth on average than the other months. In such strategies, stocks are sold at the start of May and the proceeds held in cash (e.g. a money market fund); stocks are bought again in the autumn, typically around Halloween
Halloween
Hallowe'en , also known as Halloween or All Hallows' Eve, is a yearly holiday observed around the world on October 31, the night before All Saints' Day...
.
Though this seasonality
Seasonality
In statistics, many time series exhibit cyclic variation known as seasonality, periodic variation, or periodic fluctuations. This variation can be either regular or semi regular....
is often mentioned informally, it has largely been ignored in academic circles (perhaps being assumed to be a mere superstition). Nonetheless analysis by Bouman and Jacobsen (2002) shows that the effect has indeed occurred in 36 out of 37 countries examined, and since the 17th century (1694) in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
; it is strongest in Europe. According to the efficient-market hypothesis, this is impossible.
It is not clear what causes the effect.
Most interesting about the effect is that it shows that stock market returns in many countries during the period May-October are systematically negative or lower than the short-term interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
, which also goes against the efficient-market hypothesis. Stock market returns should not be predictably lower than the short term interest rate (risk free rate
Risk-free interest rate
Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. The risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time....
).
Popular media often refer to this market wisdom in the month of May, claiming that in the six months to come things will be different and the pattern will not show. However, as the effect has been strongly present in most developed markets (including the United States, Canada, Japan, the United Kingdom and most European countries) in the last decade - especially May-October 2009 - these claims are often proved wrong.
That said, between April 30 and October 30 2009, the FTSE 100 gained 20% (from 4,189.59 to 5,044.55)
One study which tests the Halloween indicator in US equity markets found similar results as Bouman and Jacobsen (2002) over the same time period but using futures data over the period April 1982- April 2003 and after excluding the years 1987 and 1998 no longer found a significant effect, leading these researchers to conclude that it was not an "exploitable anomaly' during that time period in the United States." Other regression models using the same data but controlling for extreme outliers have found the Halloween effect to still be significant.
The original saying is "Sell in May and go away, stay away till St. Leger
St. Leger Stakes
The St. Leger Stakes is a Group 1 flat horse race in Great Britain which is open to three-year-old thoroughbred colts and fillies. It is run at Doncaster over a distance of 1 mile, 6 furlongs and 132 yards , and it is scheduled to take place each year in September.Established in 1776, the St. Leger...
Day", referring to the last race of the British horse racing season, however this day is unlikely to be known by non-Brits so it is replaced by Halloween (which in turn is Samhain
Samhain
Samhain is a Gaelic harvest festival held on October 31–November 1. It was linked to festivals held around the same time in other Celtic cultures, and was popularised as the "Celtic New Year" from the late 19th century, following Sir John Rhys and Sir James Frazer...
, about one-eighth year after the equinox).
External links
- Interactive Java Applet "Sell in May"