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Sell in May and go away…

22 July 2014, VEB.net

Investors who have been active on the equity markets for a number of years may want to take a fresh look each spring at the lengthy investors’ adage: ‘Sell in May and go away, but do remember to come back in September’. Because during the summer months, there is always the danger of sharp declines on the markets lurking in the background. The question is whether or not there is actually any truth in this old market adage.

Various economists have already tried to pin down a pattern to the volatility of markets during the summer months. They include those who swear by the ‘Sell in May’ adage. So it is not totally surprising that there is no definitive conclusion that says the markets dip more often than not in the summer. Which is just as well. Because if investing was so simple and movements in the markets always followed repetitive patterns, then it would be a good deal less exciting than it is in reality.

However, one thing is certain: there are fewer investors during the summer period, which simply keeps market activity below its average levels. The logical extension of this is that fewer investors are needed to affect an equity price – or an entire market index for that matter – which in turn means that variations in equity prices can be greater than average.

But not all summers are the same – and so it is with the market climate. If we were to have economic growth of 4% and (expected) company profits were to grow appreciably, quarter on quarter, then it would not be beyond the realms of probability that share prices would rise more than pleasantly during the summer months. You may well still remember the ‘camping rally’… or is the effect of the ‘camping crash’ still engraved indelibly on your memory?

If we look at the current stock market climate, in which the euro zone is (hopefully) recovering from a credit crunch followed by a recession, on the understanding that this recovery is still slow and moderate, then we can simply assume that investors are adopting a cautious attitude so that they don’t see their profits from the market in 2013 – and possibly 2014 – evaporate into thin air. As soon as the news takes a turn for the worse, they will decide to do a little profit-taking in the days that follow. This, in fact, is the pattern that we have been seeing again in recent weeks on the European markets.

To sum up, the markets continue to move during the summer, depending on how optimistic investors feel, only deviations in prices can work out to be somewhat bigger than average. So this is not something you need to worry about immediately. But if you’ve got cash in your portfolio, keep an eye out for some good opportunities to buy.


Macroeconomics


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