From Crash Danger to End-of-the-Year Ramp

 

[Ed note by PT: we are unfortunately a week late in posting this issue of SI, which didn’t reach us in time due to a technical problem. We decided to post it belatedly anyway: for one thing, the effect under discussion is normally in effect until the end of the year; for another, the statistical validity of this information goes beyond the current year, as it is a recurring phenomenon. Lastly we would note that we have a strong suspicion that the effect may actually be cut short this year – details to be discussed in a follow-up post]

 

Knock, knock… it’s Jack, from Wall Street

 

After the last day of October, the month that has investors in fear of the next big stock market crash follows Halloween  – and while this is a spooky day, it actually marks the start of a period that typically tends to yield promising returns for investors.

What is commonly referred to as Halloween Effect or Halloween Strategy is the fact that stock market returns on average turn noticeably positive from late October onward.

This phenomenon has been widely discussed well beyond the confines of experts on seasonality like ourselves and was inter alia subject of several academic studies, with a number of well-known scholars providing valuable contributions (Jacobsen & Visaltanachoti; Haggard & Witte; Maberly & Pierce and many others)*.

We are revisiting the topic in this edition of Seasonal Insights.

 

The Halloween Effect is a Global Phenomenon

We begin by looking at the first part of the Halloween Effect with the help of the  Seasonax Web App (note: details on the web app can be found here; readers of Acting Man qualify for a special discount)

We have analyzed three of the most important stock indexes from around the world to find out whether they exhibit a common pattern. In all three cases the time period from October 31st  to January 3rd was reviewed.

Please note that these indexes have been examined with the aim of showing a general trend. One can filter out individual stocks that exhibit the same seasonal patterns, but generate much higher returns.

The first index is the DAX, a composite of the 30 largest German companies. It shows a distinct seasonal pattern in the respective time-period with 77.78% winning trades of and an average annualized return of 34.05%.

 

The seasonal pattern of the DAX is in line with the theory of the Halloween Effect

 

The second index we looked at is the Russel 2000, the small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It shows 81.25% winning trades with an average annualized return of 24.83%.

 

In the Russel 2000 the Halloween pattern generated 13 winners and just 3 losing years over the past 16 years.

 

The last index we examined is the Japanese Nikkei 225 – a very important index in a global comparison, as it tends to exhibit deviations from general global trends. However, its seasonal trend is also in line with the global Halloween Effect pattern, with 78.57% winning trades and an annualized return of 44.18%.

 

The Nikkei exhibits roughly the same pattern as the other two indexes.

 

The Halloween Effect is a Reliable Seasonal Pattern

This seasonal analysis of three international indexes indicates that the statistical probability that stock prices will rally from October 31st onward is very high (obviously there are occasional exceptions). Depending on investment style, sector and individual stock analysis can be used as an additional filter to this analysis of the general trend.

Our aim here was to show that the phenomenon is not an illusion, but is actually  a real-world effect with strong statistical significance that applies globally.

Furthermore, note that the years in which the effect did not occur were primarily the well-known bear market phase of the GFC and the steep, but brief correction characterizing the “China scare”, while the Nikkei was also thrown off course in the year of the big tsunami (but not in 2008): 2007, 2008, 2015 in the Russell, 2007, 2008, 2015, 2017 in the DAX and 2007, 2011 and 2015 in the Nikkei.

Jacobsen and Visaltanachoti (2009: 439) also make the point, that “contrary to other anomalies, we find that the seasonal effect does not disappear after being discovered”. This means there is a good chance that this seasonal pattern will continue to be reliable in the future.

Gove app.seasonax.com a try to find more profitable seasonal investment opportunities – a wealth of good investment ideas still awaits discovery. There are no guarantees in the markets, but you can certainly let probabilities work in your favor!

 

*Bibliography

Jacobsen, B., & Visaltanachoti, N. (2009). The Halloween effect in US sectors.

Financial Review, 44(3), 437-459.

Haggard, K. S., & Witte, H. D. (2010). The Halloween effect: Trick or treat?.

International Review of Financial Analysis, 19(5), 379-387.

Maberly, E. D., & Pierce, R. M. (2004). Stock market efficiency withstands another

challenge: Solving the” sell in May/buy after Halloween” puzzle. Econ Journal Watch, 1(1), 29.

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com , which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange.

You can find an introduction to the Seasonax app and in-depth information on what it can do here. Furthermore, here is a complementary page on the web-based Seasonax app, which costs less and offers slightly different functionality (note: subscriptions through Acting Man qualify for special discounts – for both the Bloomberg/Reuters and the web-based versions of the app! Details are available on request – simply write a note to info@acting-man.com with the header Seasonax!).

 

Charts by app.seasonax.com 

 

Editing & chart and image captions by PT