Goblins, Ghouls and the Halloween Effect

This article published with permission from Zacks.com.

Halloween is fast approaching and, like everyone else, I'm thinking about my costume. In the past I've worn Lucha Libre masks and cowboy outfits, but generally I like it creepy. One of my favorites was the year when I donned a horned goblin mask, doctor's coat and carried two very large and old pipe wrenches. As regular readers of my articles, you know that I can tie the stock market to just about everything and Halloween is no exception.

Actually, the stock market and Halloween have a long-documented association. The Halloween Effect is one of many “Seasonal Anomalies.” Dr. William Ziemba, among others, is well known for his work on seasonal stock market anomalies, including the Halloween Effect. In a nutshell, the Halloween Effect consists of buying the market six trading days before Halloween and selling come May 1. The market could be bought using either S&P 500 or Russell 2000 futures or ETFs.

In The Handbook of Equity Market Anomalies, Ziemba explains that a buy and hold strategy returned 96% for the S&P 500 and 204% for the Russell 2000 from February 1993 through the end of 2010. Yet, if you followed the Halloween Effect rules and bought in late October, sold in May and held cash until late October rolled around and rinsed and repeated from 1993 to 2010, you would have earned 373% for the S&P 500 and 494% for the Russell 2000. These results include both stock dividends and interest earned on a cash position. Here are the results side by side:

Total Returns

Halloween Effect Russell 2000 494%

Halloween Effect S&P 500 373%

Buy & Hold Russell 2000 204%

Buy & Hold S&P 500 96%

As the above results illustrate, you could have more than doubled your money trading the Halloween Effect as opposed to a Buy & Hold strategy. You have to be diligent, though, and trade by the rules. One deviation from the strategy, wherein you decide to hold during the summer or wait too long to buy, could significantly change results. As with any investing strategy, you need to be disciplined.

Over the years, researchers have tried to understand this persistent anomaly. Some of their theories indicate summer vacations, Seasonal Affective Disorder and seasonal optimism as reasons for its success. Most of the research points to changes in investors' risk tolerances. Supposedly, investors are more willing to take risks when they are optimistic. Stronger risk appetites lead to more cash finding its way into the stock market. Higher stock returns are, therefore, generally the result.

There are several investment vehicles that allow you to take advantage of the Halloween Effect. These include the following (Remember: buy right before Halloween and sell on May 1st each year).

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