The most active traders, usually manning the trading desks of Wall Street, can alter market sentiment by either their presence or absence. As the weather warms, these active traders often take longer lunch breaks, which transform into 'Friday-free weekends.' And these 'Friday-free weekends' tend to occur for the better part of August.
When traders leave their desks, it's a sign for us to cool off as well, in case thin trading volume causes one of our holdings to suddenly spike or plunge. Hence, the old-adage: 'Sell in May and then go away.' At least until fall.
But is it a wise strategic move?
S&P 500 Summer Trends (2001-2011)
The month of April consistently gives the impressions of a solid market rally, and this year is no different. The S&P 500 rose, 4%, 4% and 10% respectively in each of the past three years and is up another 2.2% this month. That rally has recently extended into May, as the S&P 500 has rallied an average of 3% in the past three years. But by the end of May, as history shows, the party seems to end.
Since 2001, the market has fallen in six of the past 10 Junes (Figure 1) -- three times the rate at which the various positive months have risen. Was there a July bounce-back? The five Julys of the last decade were split, but the average gain was less than the average loss (Figure 2).
The rest of the summer doesn't hold much promise, either. An analysis by Standard & Poor's shows that in the past 60 years, the market has fallen by 0.04% on average in August. It's even worse in September, with that figure dropping to 0.78%. In fact, September is the only month to produce negative average results through the past 80 years, according to Ibbotson & Associates.
Lastly, here's a sobering stat: according to S&P, since 1950, the Dow Jones Industrial Average has produced an average gain of 7.4% from November through April and 0.4% from May through October. (Yet as I noted above, May has looked a bit stronger during the past three years.)
[Find out the truth behind Four Wall Street Superstitions That Just Won't Die]
How to Avoid a Sector's Summer Doldrums
If you believe in the notion of 'sell in May and go away,' then there are certain sectors you should be concerned about that can be especially vulnerable to the summer doldrums.
History shows that natural gas stocks also usually weaken in the summer months, unless it is an especially active season for hurricanes or a large heat wave causes a spike in demand. In their absence, heavy gas production, coupled with seasonal ebb in demand, has tended to max-out gas storage facilities. And when that happens, gas prices hit new lows and producers are forced to curtail production.
Tech stocks also tend to lag in summer months, due to the capital spending cycle. Major orders are placed at the beginning of the year and then purchasing managers are told to slow it down as the year progresses. This is due in part because it's hard to round up key materials during the summer to complete major installations when so many are planning their summer vacations.
By year's end, tech spending rebounds as purchasing managers tend to spend allocated-but-unused funds, in what's know as a budget flush.
Lastly, commodities such as precious and industrial metals tend to slump as major purchasers compete their full-year purchasing needs in the spring. Indeed, China is said to be sitting on more-than-ample supplies of copper, silver and other surging commodities, right at a time when the Chinese government is trying to cool its economy. A drop in demand would pull the rug out from some of the highest-flying commodities.
Watch the commodity sector, especially as it is priced to perfection and highly vulnerable to any slowdown in demand.
Consider An Active Trading Strategy Adjustment This Summer
The 'Sell in May...' axiom is not fool-proof. Many other factors are in play, and unseen events can always alter past dynamics. But with active traders set to start taking long weekends for the summer, a key support behind buying will slowly fade as the summer progresses.
Keep this brief history lesson in mind if and when you make adjustments to your active trading strategies for the summer months.
