Going away in May is a short-sighted strategy

YOU would think that old wives’ tales and the like have little place in the markets of the 21st century. But recent research by Standard & Poor’s Indices has shown there is more than a grain of truth in the old City trading floor adage of “sell in May and go away, stay away till St Leger’s Day”, in mid-September.

The theory behind this maxim is that historically the performance of the markets is particularly sluggish over the summer months. This is usually attributed to a drop in volumes as people head off on holiday, which removes liquidity from the market and therefore both accentuates any volatility and clouds sentiment.

Joshua Raymond, market strategist at City Index, says that historically the saying is indeed quite accurate. He explains that a lot of traders square up positions this month, especially when there has been a rally in the months leading up to May.

S&P analysed the monthly performance of 16 European markets in the S&P Global Broad Market Index over the 10 years to December 2009 and found that while the maxim held true across Europe, the severity of the impact varied depending on the country. This is particularly important for contracts for difference (CFD) traders to be aware of, especially those who trade a wide range of European indices, either for speculative or hedging purposes.

S&P found that the sell in May impact was particularly pronounced in Germany, which over the last decade saw an average total return of 3.33 per cent in the January to May period, compared with an average loss of 1.42 per cent between June and August. Findings for both Spain and France were similar.

Portugal has one of the worst performances in summer with an average loss of 3.02 per cent from June to August, compared to a 3.82 per cent gain from January to May. S&P notes that Portuguese investors who don’t reduce their market exposure after May are at risk of losing a large part of their entire year-to-date gains.

In the UK, S&P found that while the effect was more muted, the stock market only gained 0.11 per cent over the summer compared to an average 2.46 per cent rise from January to May.

However, Raymond says this could be a very important summer with plenty of market-moving events such as the emergency UK budget on 22 June, the sovereign debt crisis and austerity measures in heavily-indebted Eurozone countries.

And short-term CFD traders will welcome this volatility to make some profits. Just stay nimble and with low volumes expected, you are probably best to stick to more liquid asset classes such as indices.

So while you might be tempted to step away from your trading platform for the summer months, you’ll be missing out on a lot of opportunities.