Sell in May and go away: the Halloween Effect explained

What does it mean to 'sell in May and go away'?

'Sell in May and go away' is a trading strategy which recommends investors close their positions in May and walk away from the markets until October. The sell in May strategy is different to a buy-and-hold strategy, in which investors will ride out temporary slumps in the market.

It is popularly believed that the practice of selling shares in May originated in high society England, sometime between 1694 and 1776. The full version of the phrase is ‘sell in May and go away, come back on St Leger’s Day’. This is a reference to the St. Leger Stakes horse race – the last leg of the British Triple Crown, which is held every year in the middle of September.

Typically, wealthy investors would sell their stocks and move from London to their country escapes for the summer months. Since they would be unable to monitor their shares while they were away from the city, investors would close their positions. This, in turn, supposedly caused the markets to slump.

The Halloween effect explained

Closely linked to the sell in May and go away strategy is the Halloween effect. This is the theory that stocks perform better between 31 October and 1 May, or the winter months. With summer over, investors would return to London and reopen positions on the stock market. In return, the extra capital being invested caused greater liquidity in the market.

The Halloween effect, or Halloween strategy, advocates for investors to buy equities between the end of October and start of May, and to focus on other asset classes from May to October. Other asset classes could include fixed income, bonds, or money market investments.

As far as derivative traders are concerned, in theory, they could take up short positions in May and capitalise on the supposed slump in stock prices. They could then go long in October, when prices are thought to recover.

Is ‘sell in May and go away’ a viable trading strategy?

Historically, the 'sell in May and go away strategy' could have enabled investors to avoid slumps or losses in the summer months. Shares rose 65% of the time between the end of October and the start of May from 1920 to 1970. This is compared to a rise of 58% between May and October for those same years.

With that being said, there is some disagreement over just how reliable the sell in May and Halloween effect strategies are nowadays, and whether they should be used at all.

_{Price movements in the FTSE 100 from January to November 2018}

For example, the FTSE 100 rose from 6185 in May 2016 to 6954 in October 2016. Equally, the FTSE 100 fell to 5536 in February 2016 from 6361 at the start of November 2015. It finished at 6322 at the end of April 2016. This evidence would be contrary to the Halloween and sell in May strategies.

It is worth mentioning that the sell in May strategy is a timing strategy and is best employed by professional traders and investors. In reality, returns can fluctuate throughout the year, and could well be high in the summer months instead of the winter months. Forms of technical and fundamental analysis could be much better at predicting moves in the market when compared to the sell in May and Halloween strategies.