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Speculators are getting ready for the Halloween stock market effect

Year on year, history proves that your stock investments would perform better if you bought in November and sold them in April / May.

This phenomenon is known as the Halloween effect and there is statistical evidence going back 50 years that proves it has been successful so far.

Investors are looking to buy stocks from Halloween and early November. In particular, they study bullish divergences, sigma extremes on higher timeframes, head and shoulder patterns, and support/resistance patterns in order to assess their investments opportunities.

Many believe that the notion of abandoning stocks in May of each year has its origins in the United Kingdom, where the privileged class would leave London and head to their country estates for the summer, largely ignoring their investment portfolios, only to return in September.

What Is the Halloween Strategy? 

The Halloween strategy, Halloween effect, or Halloween indicator, is a market-timing strategy based on the hypothesis that stocks perform better between Oct. 31 (Halloween) and May 1 than they do between the beginning of May through the end of October. 

Historically, October has some real doozies as well, including some of the market’s worst days ever: the Black Tuesday plunge on Oct. 29, 1929 and 1987’s Black Monday, when the S&P dropped more than 20 percent in a single day. 

The strategy posits that it is prudent to buy stocks in November, hold them through the winter months, then sell in April, while investing in other asset classes from May through October. Some who subscribe to this tactic say not to invest at all during the summer months.

How can you take advantage of it?

The Halloween Effect is an interesting anomaly in the stock market, but long-term investors needn’t worry too much about it. Here is advice that will usually perform well in any season:

  • Buy when everyone is fearful. While it might feel good to buy when everyone else is buying, you’ll get better returns when everyone else is too afraid to buy. Plus, it’s great advice for a phenomenon called the Halloween Effect.
  • Stay diversified. One of the quickest and easiest ways to keep a diversified portfolio is to buy an S&P 500 index fund. You’ll get a diversified set of stocks immediately, and it’s what legendary investor Warren Buffett advises almost all individual investors should do.
  • Avoid timing the market. Yes, despite the Halloween Effect, it’s better to avoid timing the market, because you never know how the market will turn. Use dollar-cost averaging to buy into the market so that you don’t risk buying at a high point.

David Lintott is a freelance journalist, covering culture, sport and society. He hails from the decaying seaside town of Eastbourne, which he considers the source of his world-weariness.

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