Weybridge Assets publication

13 Mar 2015

Do Shares Really Suffer A Summer Slowdown?

At Weybridge Assets we give an unbiased opinion on seasonal market conditions and de-bunk the old axiom “Sell in May and Go Away.”

As the Wall Street saying goes, don’t sell a dull market short. There are plenty of things to legitimately worry about, but below-average summer trading volume is not one of them.

Everyone knows that the summer months come right in the middle of the six-month seasonally unfavourable period that often goes by the name “Sell in May and Go Away.”

This famous seasonal pattern however actually traces to just the third years of the U.S. presidential term. In the other three years of the four-year term, there historically has been no statistically significant difference between the S&P 500’s SPX, +0.62% winter and summer returns.

President Trump is in his FOURTH year!

Does Price Leads Volume Or Volume Leads Price?

Studying the possible impact of lower trading volume is tricky, since trading volume has steadily grown over the years. To overcome that long-term uptrend, we calculated for each month since 1972 a ratio of its New York Stock Exchange trading volume to average volume over the trailing 12 months. Sure enough, the average ratio for the months of June, July and August is nearly 5% lower than the average for the non-summer months.

Technicians have been debating for decades over whether price leads volume or volume leads price. And there are many competing econometric tests that can be employed to detect a possible causal relationship between volume and price. Not surprisingly, not all them reach the same conclusion.

  • We found either no relationship been volume and price or that volume follows price rather than the other way around. That at a minimum should give you pause if you were otherwise certain that low summer trading volume is automatically bad for stocks.
  • What you do tend to see happening is that trading volumes rise quite significantly in September.
Axiom – London

The axiom “Sell in May, go away, buy again on Leger Day”, so the old London City saying goes, referring to the running of Doncaster’s Ladbrokes St Leger Stakes, Britain’s oldest classic horse race.

With turfistes from around Britain heading for racecourse, it’s worth seeing how those who followed this saying have fared. The answer is not very well!

Because they would have missed out on a spectacular summer rise in share prices.

Halloween Effect

But there is a theory behind the axiom. While many have dismissed it as an ‘old wives tale’, at the beginning of last decade a couple of researchers decided to test out the theory, which is recognised in the rest of the world as ‘The Halloween Effect’, suggesting that you should buy again on 31 October rather than in the middle of September.

The ‘sell in May’ effect tends to be particularly strong in European countries and is robust over time.

However, most stock-market watchers say that the effect – if there is one – might have something to do with summer holidays.

They contend that companies are reluctant to make major strategic moves when so many key executives are away, with the same holding true for fund managers and financiers. Because of this, so the theory goes, share prices are inclined to drift lower.

But research looking at more recent times does not really back the theory up. During the 10 years prior to this one, the market did fall between 1 May and the second weekend of September (the traditional date of the race) on six occasions. However, on one of those occasions the fall amounted to barely two points and the FTSE 100 rose on four.

When we look at how the market performed between the middle of May and the middle of September over 29 years:

  • It rose on 18 occasions, falling on just 11.

It is true to say that the summer months do tend to be weaker but it would be very dangerous to make investment decisions on a saying that says ‘sell in May, go away’.

Spectacular summer rallies have been caused by a better-than-expected results season and an improving economic outlook.

  • As a result, analysts are now furiously upgrading their forecasts and driving share prices higher.

Following the saying “Sell in May and Go Away.” has been completely the wrong thing to do.

It never was particularly credible and the days where everyone went away for the summer are no longer.

Disclaimer: Share Trading or Trading in derivatives carries a high level of risk, and may not be suitable for all investors. Before deciding to trade you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading, and seek advice from an independent financial advisor if you have any doubts. Unless otherwise noted, all information contained herein is sourced from Weybridge Assets, Inc. internal data. The content included herein has been shared with various in-house departments within the company of Weybridge Assets, Inc., in the ordinary course of completion. Parts of this presentation may be based on information received from sources we consider reliable. We do not represent that all of this information is accurate or complete, however, and it may not be relied upon as such. This document and the financial products and services to which it relates will only be made available to accredited investors of Weybridge Assets, Inc. and no other person should act upon it.