As you can imagine, the mystique of the market lends itself to trading adages, rules of thumb, sayings and myths. These sayings tend to be created after significant market events or after extensive historical market research. Other trading adages just develop over time and are passed down from market maker to market maker. One of the more popular adages is “Sell in May and Go Away”.
What this historically means is that you should sell your equities (stocks) in May (go to cash) and then re-buy your positions in October.
This saying came from the old English “Sell in May and go away and come on back on St. Leger’s Day.” St. Leger’s Day refers to the last leg of the British Triple Crown, the St. Leger’s Stakes, which is held in mid-September. The reason for the saying is that wealthy Londoners would leave the heat of the city in the summer months. The lack of aristocrats and bankers making decisions would decrease trading activity in the markets which would leave the market “adrift”.
The same can be said of the Wall Street elite in the early 20th Century. The Rockefellers Vanderbilts, and other wealthy investors would leave Manhattan in the hot summer months and enjoy the ocean breezes in the Hamptons or Rhode Island. Even after the advent of air conditioning, the habits of the wealthy didn’t change. There is still a statistically significant decrease in trading over the summer months when the “B crew” works the market.
But does this decrease in trading volume matter? Let’s look at the market’s historical return. According to Investopedia, “Since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.”
Does that mean that this old English adage holds water? I will tell you that “Past performance is no guarantee of future results”. You never know how the markets will perform this year. (From May 1 to August 31 2017, the DJIA is up over 4% before dividends.) But, knowing that trading volume dries up in the summer months can help you to better understand why the market sometimes acts the way it does.