Seasonal Trading Adages

In our original post about seasonal trading we mentioned two adages some investors may abide by. We thought it would be a good idea to talk a little bit more about these as well as how and why they came to be.

The adage “Sell in May and Go Away” isn’t concerned with specific sectors of stocks. It’s a broad strategy that applies to the entire stock market or a diversified portfolio. The core idea rests on the historical notion that the stock market tends to under perform during the summer months (May to October) compared to the winter months (November to April). By selling in May, investors following this strategy aim to avoid this potential summer slump and then repurchase stocks in November to capture the supposedly stronger winter performance.

There are a few key things to consider with this approach. First, predicting market downturns consistently is very difficult. Missing out on potential gains during the summer, even if there is a slowdown, can significantly impact overall returns. Additionally, frequent buying and selling incur transaction fees that can eat into profits.

Something else to keep in mind is that the tourism industry typically sees a boost during the summer months, especially for airlines and cruise lines. As such, if the travel season looks particularly healthy that year then it would be wise to hold on to or even buy such stocks instead.
While the “Sell in May and Go Away” strategy offers a tempting simplification, financial advisors often recommend against it due to these limitations. There are more nuanced approaches that consider factors beyond seasonality, and a well-diversified portfolio can help weather market fluctuations throughout the year.

The “Santa Claus Rally” isn’t as specific as targeting just consumer discretionary and retail stocks, although they can sometimes benefit from it. The strategy aims to capture a general upswing in the market across various sectors during a concentrated period. This window traditionally falls on the last five trading days of December and the first two of January, coinciding with the holiday season and year-end.

There are several theories behind the Santa Claus Rally, but none are guaranteed. Some explanations point to increased investor optimism fueled by holiday cheer, institutional investors settling their accounts, or bonus-fueled buying leading to a rise in prices. While sectors like retail and consumer discretionary might see a boost due to holiday spending, the rally can potentially encompass the broader market. Investors following this strategy would ideally buy stocks in anticipation of the rally, around late December, however pinpointing the exact timing can be difficult, and the rally itself isn’t a sure thing every year.

There’s no one-size-fits-all approach to selling during a Santa Claus Rally. Some investors might choose to hold onto their positions hoping for continued growth, while others might sell if they see the rally losing steam or want to lock in profits. Remember, the Santa Claus Rally is a historical observation, not a guaranteed event. It’s important to prioritize a well-diversified portfolio over chasing short-term seasonal trends. If you’re considering incorporating this strategy, consulting with a financial advisor can help develop a personalized approach for your investment goals.

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