Gordon Scott, an active investor and technical analyst of securities, futures, forex, and penny stocks wrote an article on The Halloween Strategy. This timing strategy is built off the thesis that equity securities perform better between October 31st and May 1st. But is this theory trick or treat? 

Sell in May and Go Away

The Halloween Strategy is closely related to the idea of “sell in May and go away.” This axiom is said to have originated in the United Kingdom, where the privileged class would leave London and head to the countryside for the summer, ignoring their investment portfolios until they returned in September. The same theory applies to traders, bankers, equity analysts and others in the investment community who abandon the financial hubs for a summer in the Hamptons, Muskoka and the equivalents. We hear this referred to in the Canadian investment community as “the summer slowdown,” which proved to be the case for 2022. This was arguably amplified in 2022 due to massive economic uncertainty, not to mention, the post-COVID escape – many enjoying their first vacations in over two years.

In a study that first coined the concept of “The Halloween Strategy”, the researchers found that an investor who was fully invested for one six-month period and out of the market for the other six months of the year would theoretically reap the best part of an annual return, with half of the exposure compared to someone who invests all year ‘round.

Myth or Magic?

There is some validity to this theory, however, 2022 might prove to be an anomaly. Given the current economic uncertainty, there is a “lack of love” for equities overall, especially small and microcap companies. Despite Canada being a country of many venture exchanges, there is significant illiquidity and a heavy reliance on retail.

If you pull a top holders list for mid to large cap Canadian companies, it’s the same top holders, probably 75% of the time. But what does this mean for The Halloween Strategy?

We are living in unprecedented times – for most of us – never before have we lived through a post-global pandemic economic recovery (if we can even use the word recovery). There is so much unknown that it is causing panic and stress in the public markets like we’ve never seen before.

At Alliance Advisors IR, we know that longer-term investors look to invest in the fundamentals – quality management, a solid strategy and sector strength and trends. Instead of looking at fundamental valuation, these seasonal-longer terms or theories are more of an approach for traders and short-term market players. The best theory that can be applied during these trying times would be “survival of the fittest.” Those with capital, a solid strategy, excellent fundamentals, and hyper-discipline will thrive. What we do know, is that “this too shall pass”, and we will come out on the right side eventually.

Final Thoughts

While a topical anecdote is fun to research and generally applies to larger cap companies, at Alliance Advisors IR, we know that the whims of the market can create volatility and uncertainty. So, what’s our trick?

1. Have a strong IR strategy built on the fundamentals of communication and transparency. Keep your existing investors excited and engaged for the future and build new relationships by demonstrating performance. This is your time to shine.

2. Use this time of uncertainty for self-reflection. What’s working? What’s not? What requires a pivot? What parts of the foundation require solidifying?

3. Whether it’s May or November, focus on fundamentals. As a former shareholder activist, Alliance Advisors IR’ Co-Founder Alyssa Barry believes that if the fundamentals are strong, the right team is in place, the thesis is solid, the strategy is clearly communicated to the market, and a good governance framework is in place, your business will be just fine.

4. Seize the opportunity to engage with your existing investors and meet new ones. Eventually, the markets will be ripe with volatility and liquidity that supports future financings. Remember, it’s easier to ask for money when you don’t need it. Investors want to add you to their watch list and monitor you closely. Rarely will someone write a cheque on the spot. Build relationships early.

With spooky markets in play, communicating effectively with shareholders and investors is of utmost importance. It can help or reassure to have a trusted partner to support your investor relations and communications efforts, and we can play that role and work within your strategy to suit your needs.