A Seasonal Strategy With Leveraged ETFs by Gerald Gardner
The Halloween indicator, also known as “Sell in May and go away,” is a well-known seasonal strategy that investors apply to the financial markets. But it comes with its share of risk. Here is how you can use this seasonal strategy with a twist using leveraged exchange traded funds.
A well-known anomaly in stock market timing is the Halloween indicator. It is possible to produce a 20% annual return with a modest 12% drawdown using this indicator combined with a simple moving average and a commodity fund. The risk is also half that of a buy & hold strategy due to the brevity of the investment, which usually runs about six months.
The Halloween indicator is a famous anomaly in stock market cycles. A problem with using anomalies in the real world is that they can quit working at any time. For the anomaly to be useful, it must persist and continue despite its well-publicized results.
The Halloween anomaly has been analyzed since 1964. Emerging markets and other shorter time series have been studied since 1969. One study testing the Halloween indicator in US equity markets over a 21-year period (April 1982 to April 2003) using futures data verified the presence of a significant effect. The findings led researchers to conclude that the indicator was an “exploitable anomaly” in the US during that time period. That these studies have been published and yet the anomaly persists is a good sign that it will continue.