October 27, 2022

Market seasonality and “The Halloween Indicator”

Stock market volatility creates opportunities for investors and introduces risk. For decades, investors have attempted to time the market with the classic “buy low, sell high” strategy. Such a strategy has generally proven to be unsuccessful with most investors showing subpar investment performance relative to the market. Broader finance agrees that the market is unpredictable; however, there have been documented cases of anomalies where markets exhibit some predictability. 

The “Halloween Indicator” is a market anomaly where market returns from November through April are significantly greater than the market returns from May through October. You may have heard of the saying “sell in May and go away” which is a phrase Wall Street coined for the anomaly. According to a study by Lloyd et al. (2017) the Halloween indicator has been tested and confirmed during both the periods of 1977 to 1998 and 2007 to 2015, and investors who followed such a strategy would have outperformed a traditional buy-and-hold strategy 80% of the time. 

Market anomalies such as the Halloween indicator are products of behavioural finance. Furthermore, while the probability of achieving higher returns from November through April is higher, it is not guaranteed, and just because the anomaly has worked in the past does not mean it will hold in the future. We can say, however, that if you are investing this fall, you are stacking the short-term probabilities in your favour, especially because we have already had a significant decline thus far in 2022.  

About Northfront Financial

Northfront Financial, based in Calgary, Alberta is a boutique full-service financial planning firm serving professionals and business owners. We pride ourselves on being a different kind of investment firm. This stems from our humble roots, entrepreneurial spirit, and a culture of integrity and professionalism. Our goal is to offer the best investment products, services, advice, and ideas the financial industry has to offer from our experienced team, which includes individuals with the Chartered Financial Analyst® (CFA®), Chartered Investment Manager (CIM®), and Certified Financial Planner™ (CFP™) designations.

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