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Is The Halloween Effect In The Stock Market Useful In The Crypto Market?

FA-Digest

Various theories exist in the trading sphere. One of such theories is the Halloween effect which is also called the Halloween strategy or the Halloween indicator. Stock market traders, in particular, are more inclined to lean towards accepting this theorem since it is believed that it is integral to the cycle of the market.

On the other hand, the crypto traders are yet to fully grasp and link the effect of this concept to the volatile crypto market. In light of this, we will take a look at the Halloween effect in the stock market and how it might relate to the crypto market.

What Is The Halloween Effect?

From our previous publication titled “The Halloween effect”, we were able to define the Halloween effect as the theory which postulates that stocks tend to perform better between November 1 and April 30. Therefore, some traders utilize the Halloween strategy by ditching the stock market between May 1 and October 31, while some “trade in May and walk away”. Interestingly, the background of the strategy dates back to the 1930s, when it was common for wealthy investors to move to their country estate for the summer and completely ignore the market.

Is The Halloween Effect Truly Evident In The Stock Market?

Fortunately, the stock market is one of those markets that have been around for a while now. Therefore, we can easily compare the market cycles to ascertain the extent at which the Halloween effect influences the market performance.

A report published by Investopedia revealed that the average return on the Standard and Poor Index (S&P 500) in the US stock market between the months of November and April from 1970 to 2017 is 6.9 percent. On the other hand, the average returns on the S&P 500 between the months of May and October during the same time frame is 5.4 percent. Also, the average returns on the S&P 500 between November and April from 1991 to 2017 stand at 6.8 percent while the average returns during the months of May and October are 4.7 percent.

From this data, we can conclude that the US stock market has consistently generated strong capital gains for investors during the winter months. Another report compiled by Ben Jacobsen and cherry Zhang revealed that the winter months generated returns that were averagely 4.52 percent higher than the returns generated in the summer months. In addition to this, the reports showed that the anomaly was true for 81 out of the 108 stock markets analyzed.

What Are The Causes Of The Halloween Effect?

The Halloween effect is one of the least understood theories in the stock market. Therefore, there are many theories postulated to support the various opinions investors have of the Halloween strategy. However, there is a degree of truth in the theory which points out that professional traders tend to go for vacation during the summer months. This directly has an impact on the stock market liquidity.

Also, the mass return of investors is likely to trigger a herd mentality and the zeal to make up for the time spent away from the market. Applying the fundamentals of Wyckoff supports this assumption.

The second and third laws of Wyckoff establish that the market trend is going to alter when there is a shift in the market’s demand and supply. Since the trading volume and activity is likely to drop as a result of vacating investors, then the supply will likely be greater than the demand. As such, the prices of assets tend to fall.

The Halloween Effect And The Crypto Market

Establishing the fact the Halloween effect exists in the crypto market is a bit tricky. This is due to the nascent status of the market. However, charts from cryptocurrencychart show that the market occasionally exhibits the Halloween effect.  This phenomenon was evident in the bitcoin market in 2013, 2015, 2016, and 2017. Investors had generated more return on bitcoin in the winter months than in the summer months. However, recall that the crypto market is still very new and our analysis is based on assumptions and estimations. Yet, the Halloween effect is one theory crypto should analyze and if possible take advantage of.

Is The Halloween Effect Useful In The Crypto Market?

Cryptocurrency especially bitcoin tend to rally at the end of the year. This was evident in the last bull run. Even, venture capitalists and expert traders have predicted that the crypto market will recover before the end of the year. We know that the crypto market supports the fundamentals of Wyckoff as the demand and supply also play vital roles in price performance. Therefore, if a significant number of traders were to take a break from the market in the summer months, then the prices of assets will be impacted by the exodus.

Therefore, identifying the possibility of the existence of the Halloween effect in the crypto market will give traders an edge.  However, establishing the fact that the Halloween effect exists in the crypto market is one thing, timing your strategy to take advantage of it is another thing.

 

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