Items
For Rare use minor mana potions, mana potions, arrows and axes for your items. When you get a nice starting board that kills the first enemy wave and (hopefully) charges your hero skills, use your skills to kill the second wave and items to kill the bosses. In later stages you’ll want to have two really good moves – one that clears wave 1 and another for clearing wave 2 with some help from your skills.
Teams
Regarding your mono-teams, the best colors for this event are yellow, red and blue. Make sure you consult the 
Memento 5 Challenge Events guide for the minion color information – you’ll want to stack strong against minions so you kill them quick and reach the bosses using the least amount of moves (thus reaching them faster and taking the least amount of damage).
Your green team is benched for this event. It really won’t be any good.
Yellow
Max Banes costume so he has more punch. He’ll be the hero that will likely get mana potions to deal as much damage to the bosses as possible so you clear the stage quick.
Dawa herself can be good for enemy crowd control if you give her rogue emblems – although that’s such a niche application that you may just want to get another Bane or Melia in the future instead.
If you’re aiming for top 100, consider keeping and maxing more Banes to replace Pixie and Gan Ju as well.
Red
Leave Bauchan at home and bring Nashgar instead.
Max Hawkmoons costume and bring her with it on. Her attack buff will greatly help in dealing damage with skills for other heroes besides Namahage.
If you’re aiming for top 100, try this Spring event for Sq. Wabbit or keep any more Namahages you get from S2 summons.
EDIT: Oh there’s also a new S3 red hero, Ei-Dunn. She is basically a fire element version of Chochin, and she’s going to be very good for this challenge event as well. I’d replace Jahangir with her if you snag and max her.
Blue
If you get Gunnar’s costume, replace Ulmer.
Karil will be good until Nordri is released this Thursday (blue elemental defense down). So if you snag Nordri and can max him quickly, replace Karil with Nordri.
If you are aiming for top 100, try and get more Gatos to replace Vodnik and Valen.