The old adage ‘Sell in May and go away’ is a popular saying amongst traders and investors, suggesting that one should sell their stocks in May and refrain from trading throughout the ASX winter months, returning to the market later in the year. The origins of this saying are murky, but it’s often attributed to historical patterns in stock market performance.
Proponents of this pattern argue that there is historical evidence to support it. They point to studies that show a tendency for lower market returns during the summer months, particularly in the Northern Hemisphere (which the ASX tends to follow), when trading volume tends to decrease as those investors take their summer vacations. Additionally, there’s a perception that corporate news and economic activity slow down during this time (perhaps for the same reason), leading to less market activity and potentially lower returns.
However, the validity of the Sell in May pattern is highly debated among financial experts. While there may be some historical evidence to support it, relying solely on seasonal patterns can be risky. The stock market is influenced by a multitude of factors, including economic indicators, geopolitical events, and company-specific news, which can override any seasonal trends.
Attempting to predict short-term market movements is notoriously difficult, and many traders who follow the Sell in May strategy may end up getting burnt if the market performs well. Instead of trying to perfectly time a Sell in May market move, traders should continue to stick to their rules for finding trades.
Sell in May isn’t the only seasonal pattern, perhaps better known is the Santa Claus Rally’ in December.
The Santa rally is generally seen when stock markets rise during the end of the calendar year, typically in the last week of December and the first two trading days of January. The origins of this term trace back to the idea that ‘holiday cheer’ and optimism, along with investors’ desire to tidy up their portfolios before year-end, drive up market activity.
While historical data does suggest that such a rally often occurs, it’s essential to note once again that market behavior is influenced by a myriad of factors. So while the Santa Claus Rally is a recognisable pattern, it’s not a guaranteed occurrence every year, and will always be subject to fluctuations in the broader market landscape.
Click here to check out our latest article on Seasonal Patterns which covers what normally happens to stocks during a US election year.