From the OED:
holy, adj. and n.
The sense-development < hailo- is not clear, because the primitive pre-Christian meaning is uncertain, although it is with some probablity assumed to have been ‘inviolate, inviolable, that must be preserved whole or intact, that cannot be injured with impunity’, a sense preserved in Old Norse; hence the adjective would naturally be applied to the gods, and all things specially pertaining to them; and, with the introduction of Christianity, it would be a ready word to render Latin sanctus, sacer. But it might also start < hail- in the sense ‘health, good luck, well-being’, or be connected with the sense ‘good omen, auspice, augury’, as if ‘of good augury’: compare Old High German heilisôn, Old English hálsian, to halse (v.1), augur, divine, exorcise, etc. The sense arrangement here is therefore merely provisional; we cannot in Old English get behind Christian senses in which holy is equated with Latin sanctus, sacer.
Kept or regarded as inviolate from ordinary use, and appropriated or set apart for religious use or observance; consecrated, dedicated, sacred.
As applied to deities, the development of meaning has probably been: Held in religious regard or veneration, kept reverently sacred from human profanation or defilement; hence, Of a character that evokes human veneration and reverence; and thus, in Christian use, Free from all contamination of sin and evil, morally and spiritually perfect and unsullied, possessing the infinite moral perfection which Christianity attributes to the Divine character.
So I take holiness to mean the sacred, that which is whole and must not be profaned. As we can see from the tales of the gods, being holy is not about moral perfection or anything like that, but about the sacred–profane dichotomy. The holy is that of the beyond which is to be honoured. This holds true for gods, elves, wights, and our dead. We honour holiness by not profaning the sacred.
I don't know exactly what others mean by "the holiest time of the year," but they may mean that it is the time of the year when properly observing the sacred (e.g. offerings) is most important.