the halloween strategy is the flip-side of the market aphorism: sell in may and walk-away. it tells you when to buy. thus, there are just two rules:
- buy on the first close above the 50 day simple moving-average in the month of october.
- sell on the first day in the month of may.
how's this been working? well, let me draw you a picture:
|trading $10k on spy via halloween strategy vs. growth of $10k via passive strategies|
this chart shows that the profit and loss of trading $10,000 (without compounding!) of spy, the s&p 500 etf, by the halloween strategy over the last 15 years produced a net profit of $10,261 (double the $10k trading capital.) this beats both the passive strategies of buy 'n hold and dollar-cost-averaging over the same period which only improved the 10k invested by 5k. (note: there is no accounting for dividends and commissions.)
while it might seem fantastical to double in 15 years let me remind you that this only amounts to an annualized return of 6.8%, uncompounded.
should you participate in this year's halloween? let me just interject the cliche disclaimer: past performance does not guarantee future performance. however, knowing the past can help temper expectations. if we extend the picture back 20 years we see something different:
|halloween strategy vs passive investing over 20 years|
now, halloween strategy (profit of $18.5k) falls in between buy 'n hold (profit of $33k) and dollar-cost averaging (profit of $6.5k.) so, the boom-boom years of the late 90's were not years of out-performance for the halloween strategy relative to buy 'n hold (trick!) however, if you didn't inherit wealth 20 years ago then you are stuck doing some sort of dollar-cost averaging. this halloween strategy could be a great 401k strategy - put your money in an s&p fund for half the year and then in a fixed-income fund for the other half. if you reinvest the profits then you will get a compounding effect, which can be estimated by the rule of 72. thus, given average past results, one might expect this strategy to double your money in about 11 years.
here's the thinkscript (how to install):
# Derived from TDA's halloween strategy.
# With minor modifications to create a constant dollars Per Trade by Allen Everhart
# Source: http://www.smalldoginvestor.com
input dollarsPerTrade = 10000;
input price = close;
input length = 50;
AddOrder(OrderType.BUY_AUTO, GetMonth() == 10 and price > Average(price, length), tickColor = GetColor(1), arrowColor = GetColor(1), name = "HalloweenBTO", tradeSize = Round(dollarsPerTrade / price, 0));
AddOrder(OrderType.SELL_TO_CLOSE, GetMonth() == 5, tickColor = GetColor(2), arrowColor = GetColor(2), name = "HalloweenSTC");