Every year around the end of October, an old piece of market folklore resurfaces. It says shares tend to do better between the end of October and the start of May than over the summer months. In Britain it is better known by its other half: “sell in May and go away”. The formal name is the Halloween indicator, and while it has some evidence behind it, it is a long way from a reliable trading rule.
What the Halloween indicator says
The idea is simple. Stock market returns have historically been stronger from November to April than from May to October. Followers of the strategy hold shares over the winter months, then move into cash or bonds around May, before buying back in at the end of October.
The pattern attracted academic attention in the early 2000s, when researchers found the effect in many countries’ stock markets over long periods. That gave the folklore more credibility than most market sayings enjoy.
Why it might happen
Nobody knows for sure. Explanations include lower trading activity and attention during summer holidays, the flow of new money into markets around the start of the year, and seasonal changes in investors’ appetite for risk. Some argue the pattern partly reflects a few very bad autumns, such as crashes in October, which skew the averages.
Why traders treat it with caution
Averages over decades hide huge variation from year to year. There have been many summers when shares rose strongly and winters when they fell. Following the rule mechanically would have meant missing some excellent periods. Once costs and taxes are included, the advantage can shrink further.
There is also the issue of popularity. Once a pattern is widely known, investors may try to get ahead of it, which can weaken or shift the effect. Seasonal tendencies are best seen as background, not as a reason to override what the economy, earnings and interest rates are saying.
A simple example
Suppose that over 50 years, a stock index rose by an average of 6 per cent in the November to April period and 2 per cent from May to October. That sounds compelling. But in some of those years the summer gain was 15 per cent and the winter brought a loss. An investor who sat in cash every summer would have missed those big gains, and the average would not have protected them in a bad winter.
Common mistakes
The biggest mistake is treating a seasonal tendency as a forecast for this year. Another is ignoring the current backdrop. If earnings are falling or interest rates are rising sharply, the calendar will not save a portfolio. A third is forgetting that trading in and out has costs that eat into any small average advantage.
The bottom line
The Halloween indicator says shares have tended to do better from November to April than over the summer. There is some long-term evidence behind it, but the year-to-year variation is large and it is no substitute for analysing what is actually driving markets. For more on how the calendar can affect markets, read our guide to seasonal market cycles. To test how you weigh patterns against fundamentals, try the free Samuel & Co Trading Trader Assessment.
