The Trick Behind the Halloween Strategy
By Scott Bauer
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On the surface, the answer appears to be an overwhelming yes. According to Mark Hulbert’s Hulbert Ratings, the six-month period between Halloween and April 30 has outperformed the following six months of the year by over 3% annually since 1896. However, when years are broken out into one of two categories – midterm election years and non-midterm election years – the results paint a different picture. Over the same period, it can be observed that during midterm election years, the average winter return is 10.4%, compared to 0.8% for the summer return. In the other three years of a presidential cycle, the winter months have outperformed the summer months 3.6% vs 2.6%, respectively.

According to a study from the Journal of Financial Economics, titled “Asset Prices, midterm elections, and political uncertainty,” the discrepancy in returns during a midterm election year is due to investors’ aversion to uncertainty. In the months leading up to an election, there is an influx of economic uncertainty. Once elections are over, that uncertainty subsides, and the market subsequently reacts.

Because we are not in a midterm year is not cause for concern that the markets will fall this winter, but rather a suggestion to validate any seasonal bullishness with other trends or signals.


About the author

Scott Bauer
Scott Bauer, CEO, Prosper Trading Company

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

 

 

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