Goblins, Ghouls and the Halloween Effect

Guest Blog by Kip Robbins, CFA, Zacks.com.

Halloween is here and like everyone else, I’ve thought hard  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 1st.  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 Return   

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 tired 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 wiling 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).


The SPDR® S&P 500 ETF is a fund that generally corresponds to the price and dividend performance of the S&P 500 Index before expenses.

IWMRussell 2000 Index Fund

The iShares Russell 2000 Index Fund seeks investment results that correspond generally to the price and dividend performance of the Russell 2000 Index before expenses.

IWVRussell 3000 Index Fund

The iShares Russell 3000 Index Fund seeks investment results that correspond generally to the price and dividend performance of the Russell 3000 Index before expenses.

TNADirexion Small Cap Bull 3X – Triple-Leveraged ETF

For those with a bigger appetite for risk, the Direxion Small Cap Bull 3X – Triple-Leveraged ETF is designed to yield investment results approximately equivalent to triple (300%) the return of an investment in the Russell 2000 Index before expenses.

CLFCliffs Natural Resources Inc.

I actually found a stock that usually performs well from November to April, then very often tanks from May through summer.  Cliffs is a mining and natural resources company which produces iron ore and metallurgical coal products.  There must be some strong seasonality in both iron ore and the stock price of this company.

In conclusion, the next time your neighbors pepper their yards with inflatable ghosts, ghouls and black cats, and your mailbox fills up with invitations to costume and pumpkin-carving parties, consider these signals that it’s just about time to awake your dead cash from its tomb and bring it to life in the stock market. 

If you’d like to learn more about Seasonal, as well as other anomalies, you’re in luck.  The Handbook of Equity Market Anomalies has just been released and it details several winning strategies used by investment pros.  You can also learn more about various market anomalies by visiting a website dedicated to their explanation and discussion: hema.zacks.com.

Now it’s that time of the year again, so create your monster, drink some blood, and get into the market!

Related Links:

(Disclosure: Zacks is unaffiliated with FOLIOfn Investments, Inc. but does use its services.)

SPONSORED BY Folio Investing The brokerage with a better way. Securities products and services offered through FOLIOfn Investments, Inc. Member FINRA/SIPC.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s