All About “The Halloween Effect” In Investing And Trading


Clarice Hinson | Updated: 26-10-2021 10:33 IST | Created: 26-10-2021 10:33 IST
All About “The Halloween Effect” In Investing And Trading
Image Credit: Brian Wray's Designer Team

The time to short Bitcoin might have ended for the next few months, and it could start with the month of October and something called "The Halloween Effect." The Halloween Effect isn't like the spooky sounding quadruple witchings that happen when quarterly contracts expire but can have a serious impact on markets.

The Halloween Effect is based on the idea behind seasonality and cyclicality in markets, and is essentially the opposite of the phrase "sell in May and go away." The latter references how investors and traders being distracted by nice weather and vacations can lead to stagnant markets or even a downtrend.

But what exactly happens when The Halloween Effect appears? And how might this impact crypto, the stock market, and other global markets of macroeconomic importance?

Sell In May And Go Away Versus The Halloween Effect

To properly explain The Halloween Effect, we'll first look at the definition of the old financial world adage "sell in May and go away." According to Investopedia, the popular phrase is "based on the historical underperformance of some stocks in the "summery" six-month period commencing in May and ending in October, compared to the "wintery" six-month period from November to April."

"Some investors find this strategy more rewarding than staying in the equity markets throughout the year. They subscribe to the belief that, as warm weather sets in, low volumes and the lack of market participants (presumably on vacations) can make for a somewhat riskier, or at a minimum lacklustre, market period," the definition continues.

Over the last 70 or so years, the Dow Jones Industrial Average had less than a 1% on the average gain from May through October, while post-October performance through April averaged more than 7%.

Vacations or a lax state of mind might not be the only reason for the seasonal shifts. The positive phase tends to come to an end, just as the tax season deadline rolls around. Could traders and investors suddenly be more worried about their bottom lines? Could it be a time for reallocation of assets and capital? How about a mix of all of the above?

Will Traders Get A Trick Or Treat This Q4?

With all that said, you can understand why The Halloween Effect happens. The name mostly comes from the holiday the month ends with, which tends to have a spooky and ominous tone. The Halloween Effect is no trick, however, and if it stays true to its positive trend, traders and investors are in for quite the treat this year.

The stock market is struggling right now due to the situation with Evergrande, but things could turn around at a moment's notice. The stock market is in a bubble according to most major economists and investors, but irrational markets can stay that way for much longer than most expect.

A lack of change in interest rates and an abundance of stimulus money has kept asset prices afloat. But the stock market's cycle could be over for some time.

Why The Bitcoin Bull Cycle Could Conclude Around Christmas

If the stock market is in trouble, there is still hope for Bitcoin and cryptocurrencies. These assets have yet to complete their latest market cycle, and a stagnant stock market or a selloff could cause capital to flow into crypto and cause the greatest Q4 the asset class has ever experienced.

Bitcoin bull markets also historically conclude in December every four years based on each halving cycle. Bitcoin is now entering what should be a very profitable October, after the bloodiest Q2 on record and only a meager Q3 recovery. Q4 will have to prove the asset class is worth the attention of institutions.

If institutions do choose now to pile in, it could cause a wave of FOMO and Bitcoin mania unlike ever before. The sentiment around the peak should be similar to what investors and traders saw at the height of the dot com bubble.

When Will The Bubble Burst Across Finance?

When the bubble bursts in the stock market and the current crypto cycle comes to an end, it might be finally time for metals to prove that they still have a place as a monetary standard.

A potential bubble burst in December for Bitcoin is very possible, because as history has shown, the cryptocurrency has only peaked during the last month of the year. Legendary traders like WD Gann used astrology and planetary cycles to predict the tops and bottoms of commodities markets, which also most peaked in the month of December.

Looking back at the dot com bubble, however, the top was actually in March of the year 2000, or just ahead of the "sell in May" timing. When the stock market finally began to recover, was in October 2022. Still don't believe in the impact of these seasonal shifts in investor sentiment?

Build A Portfolio To Protect Against Economic Shakeup

Clearly, the entire macro landscape is at a pivotal moment, where some markets will experience The Halloween Effect and strong Q4 performance, while other markets will fall into a downtrend and wait their turn for capital to flow back as all markets are cyclical.

There is no telling what might happen given the current economic health, political tensions, and a world weakened by a pandemic. These final days before the bubble ends are pivotal to getting all the profits you can to protect oneself from whatever economic storm is to come after the dust settles on the collapse.

Even Bitcoin and other cryptocurrencies might struggle in the years ahead, again allowing assets with a deeper history like precious metals to shine. To prepare for whatever is coming next, you need a platform that offers access to all these global markets from a single account.

PrimeXBT is an award-winning margin trading platform with long and short positions on forex, crypto, stock indices, commodities, metals, and more, all under one roof. Using the advanced order types, built-in technical analysis software and other professional tools, anyone can build a portfolio that can withstand any situation, and offer the flexibility to switch gears if necessary.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)

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