Friday, October 28, 2011

Halloween Effect

The Halloween Effect is getting passed over this year.  All eyes are on the European debt crisis and most traders are preoccupied with calculating expected returns under ever riskier market conditions. The Halloween Effect is really the second half of the old market maxim “sell in May and go away.”  In the fall investors return from vacation and begin picking up undervalued equities.  The action has been noted to created an upward movement in stock prices that begins after Halloween and continues through April. 

Academics ignore calendar effects altogether so you will not find a great deal about the Halloween Effect in scholarly literature, proving or disproving its existence.  However, two professors Bouman and Jacobsen found the Halloween Effect very much in evidence in the U.S. and thirty-five other countries around the world. 

This calendar effect has been a topic in this blog before, but this year is different.  We see no trend moving back into the market propelled by the calendar-related investing or any other driver.  Granted we have observed net money inflow into all sectors in the months of September and October this year.  However, the uncertainty associated with sovereign debt problems has left the market in a state of volatility that has overshadowed sapped the impact such money flows might have on valuation and pricing.

Given, that investors appear to be entirely too skittish given debt problems in Europe in particular.  We expect little in the way of Halloween Effect, making it necessary for investor to remain very careful in their stock picking.  Simply allocating more to equities without discrimination among stocks is not likely to yield strong results.

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