Will We See the Halloween Effect in 2020?

halloween effect in 2020
Source: https://hips.hearstapps.com/hmg-prod.s3.amazonaws.com/images/halloween-quotes-1540914760.jpg?crop=0.864xw:0.647xh;0,0.353xh&resize=980:*

The past few weeks had been a real rollercoaster for stock markets and during the past last few days, the bears took control over the order flow. It was the largest selloff since March as a confluence of negative events were no longer supporting aggressive buying. Rising COVID-19 cases, new lockdowns in Western Europe, and the uncertainty around the US election had all hit stocks.

Last week we’ve talked about why COVID-19 is not influencing financial assets as it did at the beginning of the year, but today we would like to discuss the “Halloween Effect” given that we’re at the end of October.

The Halloween Indicator

Between October 31st and May 31, stocks had been performing above-average, that is why the saying “sell in May and go away” is so popular. Buying on Halloween would have produced consistent returns over time, even though we don’t have any guarantee it will happen each year.

Based on a Hulbert Financial Digest analysis on the Dow Jones Industrial Average, the index produced an average Halloween-through-May-day gain of 4% whenever the market was a loser over the two months before Halloween.

If we analyze how stocks performed in September and October, we can easily notice that these two months had seen weakness starting to engulf the markets, leading to poorer returns. Based on other risks, the Halloween indicator is a contrarian approach this year, but will it occur?

The risk to the downside persist

The second wave of the pandemic will be the greatest challenge of the winter and countries will very likely keep tight restrictions in place to prevent the overwhelming of the health sector. This will surely have consequences on the economic recovery and thus stock valuations could be subdued.

On top of that, it will be important to monitor other significant risks like Brexit, a contested US election, and rising tensions between China and the US, because these factors could weigh on the market sentiment, as well.

Will Markets Look Past Negativity?

Faced with difficult conditions, governments and central banks will continue to provide fiscal and monetary support, but the question is whether the markets will look past these risk factors and push valuations higher.

Binary Options Zone Copyright © 2019