Sell in May?
By Brad Thomason, CPA
April 28th, 2015
It’s about this time every year when you are likely to hear one of the stock market’s most enduring sayings: “Sell in May, and Go Away.”
This little nugget dates back to the era when Wall Street really was the physical place where stock trading took place. Every summer, so the legend goes, the most successful traders and market makers would close up their books, and head to their summer homes in the Catskills or the Hamptons or wherever. They would stay on extended vacation all summer, and as a result, nothing much would happen in the way of good stock opportunities. In fact, the expectation was that the market would actually lose ground. So, the conventional wisdom went, better to be on the sell side too, pop your money over to bonds for the summer, and sit out the heat along with everybody else.
Well, that is of course not how things work these days. Stock trading is automated and global and constant. But the funny thing is that the advice to sell in May remains. Because more years than not the summer is in fact a flat or even negative period for the market.
This little factoid provides us with a good opportunity to talk for a second about an aspect of market behavior which doesn’t get mentioned much. If I asked you what makes stock prices fall, I bet you would respond by telling me that it happens because people are selling.
But that answer isn’t completely right.
No, the more correct answer is that not-buying is what causes the market to fall. Certainly selling is a form of not-buying. But so is doing nothing. Which is what you get when everyone has run off to the beach.
Think of it in terms of how the mechanics of the market work. If someone shows up to sell 100 shares and there are plenty of buyers, the trade clears immediately and the price changes very little. We had selling, but we didn’t get a decline.
Conversely, consider a scenario in which someone shows up to sell and no one is buying. What happens? The seller lowers the price… and continues to do so until it gets low enough to coax someone out of that not-buying pattern of behavior. If you had someone else thinking about selling, they would see what happened to seller number one. If they have to sell that day, they would then get nervous. So what do they do in the face of what might be low or nonexistent demand? They drop their price just a little bit more, to make sure that they get cleared even if they have to take a haircut to do it. And so it goes.
I tend to view the “summer curse” in modern times as something of a superstition. But I also never lose sight of the market’s ability to turn cautions into self-fulfilling prophecy. The market doesn’t like uncertainty, and there have been plenty of times when it invented something to scare itself when no actual boogeymen were to be found.
I’ll leave it to you to decide where you fall on the matter. Just remember this though: falling volume and a lack of eagerness on the part of buyers almost always shows up in the numbers before significant downturns. Which is not to say that a big downturn is imminent every time such data points show up. Just that you usually don’t have big drops without some wobbling first. If you see that pattern starting to settle in as we approach summer, especially if you were thinking it was time for a rebalance anyway, it might be in your best interest to go ahead and make the changes.
Then, maybe you too can feel comfortable running off to the beach for a vacation of your own.