Wednesday, 20 May 2009

Halloween Indicator

There is a Stock market theory known as the Halloween Indicator which is based on the old adage “Sell in May, and go away”. As suggested by its name, the Halloween Indicator goes a step further and suggests a time to return and buy, namely Halloween. The reasoning is that historically the period from November to April has shown significantly stronger stock market growth that the excluded months of May through October.

Although this is often dismissed as a superstition, analysis by Bouman and Jacobsen in 2002 confirmed this effect in 36 of 37 countries they examined, including the UK. In many countries it was noticed that the stock market returns during the period May to October are often negative or lower than the short term interest rate. This flies in the face of financial theory which states that stock market returns should not be predictably lower than the short term (risk-free) interest rate.

As we are currently in May, you may well have seen reference to this in the papers recently. It’s one of those recyclable stories that the media loves, and whether this is an anomaly that you can exploit is debatable.

I have a similar Halloween effect on my trading accounts. My trading history does not go back quite so far as that of the Stock Market, (5 years versus 300), but my top six performing months are all between October and March, with the worst quarter being that of April through June.

Whereas for the Stock Market, there might be some mystery as to why the Halloween Indicator should occur, for me, there is no secret. My best sports occur in the October to March window. I like my trading to be fast and furious, and there is nothing that beats NBA or NFL for that. Football and Rugby are OK, but value is so hard to obtain with half the world watching.

Summer brings Cricket and Golf, but these are too slow for my liking although both have occasional big swings (pun intended). Baseball liquidity is at an all-time low this year, and although tennis is fast and furious, it’s only because court-siders are fast which leaves me furious.

Other summer events I have dabbled in are Formula One, Volleyball, Yachting, Aussie Rules, Darts, Athletics and Olympic swimming and Beach Volleyball, but I really should just close the computer down and take time off.

I’ll be back in October.


Anonymous said...

I hope this is a joke, i like reading your blog every morning ;-)

I like betting NBA too (yesterday magic rally was just too wonderful), and also tennis, so i wont be leaving for the whole year.

Have a nice break, but dont leave until the end of the playoffs, denver and magic still have many things to say and the markets just love cavs and lakers.

Good luck


Cassini said...

Thanks for the comment. Yes, it was a joke. I'll be updating the blog every couple of days or so. I traded the Cavs - Magic game this morning like an idiot, but still managed to come out ahead thanks to that 3 pointer from the Magic at the end there. Both series look like they could have some close games - volatility is good!!