“Sell in May, go away…” Why it’s worth listening to old advice on seasonality.
Few traders would be foolish enough to build their strategies around generalisations. Take this old chestnut, for instance: “Sell in May, go away, come back on St Leger day” (the St Leger being the final classic horse race in the UK flat racing season – usually held in mid-September). Granted, that centuries-old phrase might have had a grain of truth in it in the days when traders retired en masse to their country piles for the entire summer. But surely it can’t still be relevant in 2015?
Don’t be too quick to dismiss old advice. Seasonality is a real thing in trading and shouldn’t be ignored when you’re putting together your plan. Here, we take a closer look at the summer lull and try to unpick some of the reasons why it’s still a reality in the 21st Century. Will this year be any different? We consider what Summer 2015 may have in store…
Seasonality: what are we talking about?
How important is the calendar when it comes to trading decisions? Well for one thing, there are those times of the year when both institutional and private investors are more likely to take a long hard look at their portfolios. This can have a bearing on market activity. For instance, towards the end of the financial year, investors are more likely to sell stocks that have declined in value in order to claim capital losses against their tax bill. Similarly, January is a time when many investors have access to fresh capital to invest in shares and the markets have a tendency to perform well at this time.
There are also specific seasonal factors that can affect particular sectors. Take retail for instance: for many retailers, the financial well being of the company is dependent largely on strong revenue over the Christmas period. Come January when retailers announce their festive sales figures, there tends to be significant movement in this sector in reaction to how well individual players have performed. This year, for instance, Amazon’s announcement of net profits of $214m for Q4 2014 (compared to losses of $437m the previous quarter) was enough to boost the company’s share price by 8%.
In broad terms, the markets are subject to seasonal stock trends that make it more likely that prices will shift at certain times of the year. In part, this can be due to changes in the number of traders active in the market and the amount of fresh capital at their disposal. It can also relate to what’s happening with specific industry sectors.
What’s the evidence for “Sell in May, go away…”
The suggestion is that right at the beginning of the summer, traders have a tendency to offload higher risk assets in preparation for a “long holiday”. Even if this were true at one time, surely one-touch trading and the ability to keep up with precisely what’s happening in real time means there’s no excuse why summer shouldn’t be a time for “business as usual”?
In 2012, two academics, Ben Jacobsen and Cherry Yi Zhang published Are Monthly Seasonals Real? A Three Century Perspective. This compiled data across 108 countries with some of this data going back as far as 1693. Referring to “Summer” as the 6 months from May to October and “Winter” from November to April, it showed a discrepancy between Summer and Winter that is as old as the data itself, that is in evidence globally and that continues into recent times. In the UK, for instance, there was evidence of the ‘Sell in May’ effect as far back as the 1690s.
So should you act on this trend?
It’s worth bearing it in mind, but that’s not to say you should base your entire strategy around it. Following the Jacobsen and Zhang study, Fundexpert looked in closer detail at what would have happened if an investor sold their FTSE 100 shares on May 1 and repurchased on 14 Sep the same year (compared to a ‘buy and hold’ strategy over the same period). If they had acted in this way three years in a row (2011, 2012 and 2013) they would have been up 39.53%. Long term however, i.e. if they had followed the St Leger strategy between 2002 and 2012, they would have under-performed compared to buy-and-hold.
One problem is that although there’s evidence for a trend, there’s little to explain what actually causes it. Research on trade volume points to the fact that both large and small investors trade less during the summer months – so there may still be some validity in the argument that the discrepancy is due in part to the fact that many of us are on holiday. Equally, there’s likely to be an element of self-fulfilment here: technical analysis reveals historical patterns from past years and buyers take heed of these when making decisions. As a result, the same broad patterns are replicated year on year.
Will the St Leger pattern be in evidence in 2015?
So far at least, there is precious little evidence to suggest that traders are in go-slow mode. The election result saw an initial 2.3% surge in the FTSE 100. Notable winners included Babcock, the engineering firm largely responsible for Trident, whose price jumped 9%. Lloyds Banking Group and RBS also saw a boost – due presumably to the fact that higher bank levies seemed to be off the agenda.
A week later however, the post election surge already seemed old news as a fall in bond prices led to a fall 84-point fall in the FTSE 100. Looking further forward into the summer, the question of whether or not Greece will be able to reach agreement over its IMF debt repayments is likely to have an impact on those companies that are exposed to European markets.
Whether or not the markets will be lower in mid-September than early May is tough to call – but with other things going on, few would attribute that movement to the ‘Sell in May’ effect.