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The Halloween Effect in US Sectors: Comment

Last Updated on 10 February, 2024 by Rejaul Karim

The Halloween Effect, or “Sell in May” strategy, has been a popular topic among market researchers who seek to uncover seasonal patterns in the financial market. A recent study by Jacobsen and Visaltanachoti (2009) titled “The Halloween Effect in US Sectors: Comment” contributes to this ongoing discussion by examining the relative performance of sectors during the winter and summer periods.

However, the study may be incomplete, as it overlooks the potential impact of the optimism cycle hypothesis and its connection to the seasonal sector rotation strategy, as explored in Doeswijk’s (2005) research.

Furthermore, similarities between Jacobsen and Visaltanachoti’s documented sector rotation strategy and Doeswijk’s (2005) study raise questions about the reasoning behind certain omissions. Understanding these possible explanations for market seasonality may provide valuable insights for future research into the Halloween effect.

Abstract Of Paper

We argue that the Jacobsen and Visaltanachoti (2009) study is incomplete. Jacobsen and Visaltanachoti (2009) evaluate the Halloween effect or ‘Sell in May’-effect as documented by Bouman and Jacobsen (2002), and extend the analysis into the relative performances of sectors during the winter and summer period. First, Jacobsen and Visaltanachoti (2009) do not mention the optimism cycle hypothesis in their list of possible behavioral explanations for the well known seasonal pattern. Next, their documented sector rotation strategy looks strongly like Doeswijk (2005). By withholding a reference to Doeswijk (2005), they miss the opportunity to give a possible explanation for the seasonality in relative sector performances. Doeswijk (2005) suggests a link between the seasonal sector rotation strategy and a cycle in investors’ optimism.

Original paper – Download PDF

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Author

Ronald Q. Doeswijk
Independent

Conclusion

In conclusion, the study “The Halloween Effect in US Sectors: Comment” by Jacobsen and Visaltanachoti (2009) provides an interesting analysis of the impactful Halloween effect and the relative performances of sectors during winter and summer periods.

However, the study’s limitations in addressing the optimism cycle hypothesis and its potential influence on these seasonal patterns cannot be overlooked. Additionally, the similarities between their documented sector rotation strategy and the study conducted by Doeswijk (2005) call for further investigation into the reasons behind these omissions.

Incorporating these aspects into future research could offer a more comprehensive understanding of the market seasonality and the factors that drive the Halloween effect. By doing so, market participants and researchers alike may find valuable insights into the mechanisms underlying these key market behaviors and potentially devise more effective investment strategies.

Related Reading:

Global Tactical Sector Allocation: A Quantitative Approach

The Optimal Use of Return Predictability: An Empirical Analysis

FAQ

Q1: What is the main critique presented in Ronald Q. Doeswijk’s commentary on Jacobsen and Visaltanachoti (2009)?

The main critique is that the Jacobsen and Visaltanachoti (2009) study is incomplete. Doeswijk argues that the study overlooks the optimism cycle hypothesis, a potentially influential factor in the observed seasonal patterns, and fails to reference Doeswijk’s (2005) research, which presents a similar sector rotation strategy.

Q2: What is the optimism cycle hypothesis, and why is it relevant to the Halloween effect?

The optimism cycle hypothesis suggests a link between changes in investor sentiment and seasonal market patterns, such as the Halloween effect. It posits that investors become more optimistic as the year-end approaches, influencing their behavior in the market. Doeswijk contends that this hypothesis is not considered in Jacobsen and Visaltanachoti’s study, potentially limiting the understanding of market seasonality.

Q3: What is the significance of the similarities between Jacobsen and Visaltanachoti’s sector rotation strategy and Doeswijk’s (2005) study?

The similarities raise questions about the reasons behind certain omissions in the Jacobsen and Visaltanachoti study. Doeswijk suggests that referencing his earlier work could have provided a possible explanation for the seasonality in relative sector performances, offering a more complete analysis of the factors influencing the Halloween effect and sector rotation strategies.

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