Halloween Effect Is Worth 7% In 2 Months For 13 Years

Includes: DIA, EWG, QQQ, XLU
by: Fred Piard

It has been proven (click here) that simple seasonal strategies on ETFs may have returned 20% to 33% a year for 10 years. Seasonal patterns have been documented for decades, but scientific explanations for their consistency have failed in spite of some interesting academic publications.

The easiest part may be to explain why November and December are among the best months of the year. There is a combination of commercial and psychological impact of Halloween ("Halloween effect"), Christmas ("Santa Claus rally"), accounting optimization, and buying fever driven by fund managers willing to make their portfolios look better at the end of the year ("window dressing").

Regardless of the possible reasons (and regardless of the probabilities for the current year), here are the facts: investing in DIA (SPDR Dow Jones Industrial Average) only in November and December from 11/1/1999 to 12/31/2011 would have returned 68% (in red) compared with 15.7% for the Dow Jones index (in blue).

There is a discrepancy since the red line includes the dividends and the blue one doesn't. Nevertheless an average monthly yield about 0.2% received only twice a year doesn't explain the difference.

Indexes, countries and sectors are not created equal for the November-December seasonal pattern. I have shown in a previous article that the Nasdaq 100 (ETF: QQQ) and the German stock market (ETF: EWG) were good candidates for seasonals. It's more complicated for sectors: we have to cope with the superposition of cycles of different and variable lengths. Seasonals work better on global indexes. However, Utilities (ETF: XLU) is one the few sectors with a significant end-of-year bias for more than 10 years.

Here is a table with the returns of investing in these ETFs just two months a year in November and December for 13 years:

Return w/dividend % DIA QQQ EWG XLU
1999 7.6 41.3 20.3 -6.3
2000 0.3 -28.5 -0.6 -1.7
2001 8.2 11.8 13.6 1.5
2002 -1.1 -5 -4 3.9
2003 6.5 2.4 17.2 6.5
2004 8 9.1 12.4 5.7
2005 4.9 7.2 12.3 5.4
2006 4.4 3.7 10.3 3.7
2007 -2.1 -5.7 2.5 0.6
2008 -4.9 -9.1 5.3 0.9
2009 8.6 13.3 9.8 11.7
2010 4.7 4.6 0.3 0.7
2011 5.3 -0.1 -2.8 3.1
Average 3.88 3.46 7.43 2.75
Max Drawdown % -21 -33 -22 -15

With an average return above 7% for two months and a 22% drawdown, the winner is EWG. XLU shows a positive return (with dividends) in November and December every single year for 11 years.

Caution: Some seasonal patterns are powerful on the long term, but pure seasonal strategies are likely to have deep drawdowns. Investors may use seasonals to improve their portfolio management, for example, investigating opportunities for the end of the year in Utilities or Germany. I use seasonals to hedge my tactical allocation portfolio (article here).

You may want to click here to read more about our research.

Disclosure: I am long DIA, EWG, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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