Those who have been involved in trading the markets for some time will likely be familiar with the old stock market sayings “Sell in May, and go away”, “the January effect”, and “the Santa Claus Rally”. Although they might sound clichéd, these sentiments are backed up by a long history of observation in equity markets, indicating a strong case for seasonal trading patterns.
Particularly as far as the old “Sell in May” proverb goes, which indicates a weaker stock market performance during the summer months, the evidence would suggest that investors should monitor these indicators carefully. Statistical data collected across multiple decades still stands up to reinforce the fact that stocks really do tend to underperform from May to October and gain again throughout the winter – so it is no surprise that we hear the same phrases cropping up year on year.
However, with the COVID-19 pandemic driving all sorts of financial upheaval, the past 12 months have been anything but typical. As such, some traders might be tempted to deviate away from conventional wisdom this year.
With this in mind, how much attention should traders pay to old Wall Street truisms in 2021?
Why do traders ever sell in May and go away?
The prevalence of seasonal trading patterns has a lot to do with the fact that human beings are creatures of habit. As we tend to default to similar ways of thinking each year when it comes to our investment decisions, it would be fair to say that these seasonal patterns can become predictable.
So, why do traders sell in May? A simple answer to this question would suggest that the key to these seasonal patterns is a result of natural fluctuations in investor demand for shares, relative to their availability at certain times of year. While this may be true, there are a whole host of other factors that also contribute to the “sell in May” effect.
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A perfect example of one seemingly simple factor that can have a notable influence on equity markets is the weather. Since commodities are tangible items – like crops, metal, oil and gas – unusually cold, hot, wet or dry weather can affect these materials, which in turn can impact everything from agriculture and mining to shipping and energy. Similarly, in the summer months we tend to witness falling demand for natural gases, resulting in falling stock prices. Historically, there have been 18 falls in 21 years, so investors should monitor this pattern, just like any other year.
Other financial commentators would put these patterns down to changes in investor sentiment throughout the year. Take for example the so-called “Santa rally” – most global stock markets tend to enjoy strong gains in December, as investors are spurred on by the holiday spirit. Although there have been some “down” years to note, particularly following the global financial crisis in 2008, the FTSE 250 has seen a staggering 30 gains in 35 years throughout December – so traders should still watch to see if Santa arrives in 2021.
Watch the biotech and pharmaceutical stocks
One particular area investors would do well to watch during the summer months is the performance of biotech and pharmaceutical stocks. While these usually attract traders’ attention around this time of year because clinical studies are typically published in July and August, interest will likely be higher than usual in the pharma sector, as the pandemic has magnified the value of the biotech industry. Positive clinical outcomes in these studies can often lead to a boost in share prices, despite the aforementioned tendency for the stock market to underperform in the summer months, so traders should weigh up their options carefully before selling.
Ultimately, stock market axioms can often provide a useful steer for investors throughout the year. As such, HYCM has recently added Seasonax to its services, a leader in seasonal trading pattern analytics to make these patterns more identifiable in the stocks, commodities, indices and FX markets – allowing traders to invest with greater ease.
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Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.