In the month of May, I’m going to be taking a little summer vacation and go camping. As a result, our trading activity over the next several days is likely to be lower than usual. And of course I’m not the only one; this summer other financial advisors, broker-dealers, hedge fund managers, and other professional and amateur traders all around the world will be taking holidays, during which most will do little or no trading. Do all these vacations have an effect on market prices?
The stock market is subject to a seasonal effect in that at certain times of the year, month or even week, share prices can rise or fall.
There is an old piece of advice in finance, “Sell in May and go away.” That is, sell your stocks before the summer months and buy them back in the fall.
This can be because there are fewer traders active in the market (for example over summer holidays) or more traders in the market (for example as companies’ and investors’ tax years come to an end). This will also affect how volatile share prices are.
It can also be because traders have simply come to expect rises or dips at these times and the expectation becomes ‘self-fulfilling’. Many traders now rely on technical analysis – using charts to identify historical patterns in the price of an asset – so tend to sell or buy at the same time as a result.
It is important to remember, however, that seasonal stock trends do not apply all the time and should only be one factor in your trading strategy.
1. “Seasonal trends do not always apply and should only be one factor in your trading strategy.”
2. Many big traders go on holiday for the summer and sell out of big or risky shareholdings first, pushing their price down. The old “sell in May” saying advises them not to buy shares back until August- September.
Long weekends and national holidays :-
Share prices often rally ahead of long weekends and three-day holidays, such as Independence Day etc.
This has been attributed to simple optimism and high spirits among traders.
There is also a more fundamental basis, however, as consumers tend to spend more over holidays, especially ones like Christmas. This can push up the share prices of retailers in particular.
“Share prices often rally ahead of long weekends and three-day holidays. They also tend to experience their biggest falls of the week on a Monday and their biggest rises on a Friday.”
Because trading volumes and liquidity are lower over the summer, it is easier for one big trade to push prices around. Therefore share prices can be more volatile over this time and trading can be higher risk.
The end of a financial quarter or year can also see stock markets become quite volatile, with the share price of some companies reversing direction.
This is because institutional and retail investors often ‘rebalance’ their portfolios at these times, looking to see which of their investments have performed well.
If the share price of a company they have invested in has experienced a particularly strong uplift over the period, they may decide to take profit on those trades and sell the shares. This can push down the company’s share price.
If the share price of a company they have invested in has experienced a particularly sharp fall, they may decide that the company is now undervalued and decide to buy its shares while prices are cheap. This can push up the company’s share price.
Towards the end of the tax year, many investors also sell stocks that have declined in value throughout the year. This is so that they can claim capital losses against their tax bill
It tends to push such share prices down temporarily.
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Share prices are also believed to behave in a certain way depending on which day of the week or month it is.
The so-called Monday effect refers to the tendency of share prices to experience their biggest fall of the week.
There are a number of theories about why this happens. Some have attributed it to a large volume of bad news being released over the weekend. Others say it is simply that investors’ spirits are low as they return to work.
In contrast, Fridays often see share prices experience their biggest rise of the week.
Share prices also often perform better towards the very end and very beginning of a month, dipping in the middle.
In this Story you have learned that …
1. the stock market is subject to seasonal stock trends that at certain times of the year, month or even week, share prices can rise or fall. This can be because of changes in the number of traders active in the market or because technical analysis has made historical price patterns more ‘self-fulfilling’.
2. stock markets tend to perform well in January as this is when many investors have fresh capital to invest in shares.
3. share prices tend to fall over the summer months as big traders go on holiday and sell high-risk assets.
4. the end of a financial quarter or year can also see stock markets become quite volatile, with the share price of some companies reversing direction.
5. towards the end of the tax year investors may also sell their stocks that have declined in value over the year so that they can claim capital losses against their tax bill.
6. share prices often rally ahead of long weekends and three-day holidays.
7. share prices can experience their biggest fall of the week on a Monday as bad news over the weekend is digested and as traders’ spirits fall on their return to work.
8. share prices can in contrast experience their biggest rise of the week on a Friday.
9. share prices also tend to perform better towards the very end and very beginning of a month, dipping in the middle.
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