"Sell in May and go away," advises the trading maxim. But with stocks at record highs, one trader at the New York Stock Exchange is recommending the strategy with a twist.
In an interview with Yahoo Finance, Jay Woods, chief market strategist at DriveWealth Institutional, recalled May 2020, when stocks were only beginning their meteoric rise. "'Sell in May and go away' was an expression I actually joked about last year — like, where are we gonna go?"
This year, he's recommending investors get out and enjoy the reopening economies of the world — especially as many investors are sitting on nice gains for the year and can afford it. But, he's definitely not advising investors to sell everything — just play a little defense if necessary and enjoy the fresh air.
"[T]his year, people are ready to go away. I can't wait. I'm one day away from my first shot," said Woods, referring to the COVID-19 vaccine. "And May seems to be the time where people will actually — maybe — take advantage of these gains."
Seasonality in markets explained
The full axiom was originally, "Sell in May and go away, and come on back on St. Leger’s Day.” It has its roots in the City of London. Financial professionals would go on holiday in May for approximately four months to escape the summer heat and return for the St. Leger derby in mid-September. Traders and bankers in the U.S. appropriated the aphorism over the years and condensed it to its current form.
Many traders still leave their desks for the summer. Volume dries up, liquidity tends to wane, and the bearish summer tendencies become a self-fulfilling prophesy — to an extent. The likelihood of markets to follow predictable patterns based on the calendar is called seasonality — accounting for up to one-third of a market's price movement.
While a powerful indicator at times, there can easily be overriding factors. Entire books and websites are dedicated to the study, such as The Stock Trader's Almanac, which has been published since 1967. The author, Jeff Hirsch, has combined seasonality with other technical indicators to produce a robust trading strategy over time.
On alert for a pause
Woods takes account of the current year-to-date gains for the indices and sees the potential for some cooling off.
"We could see a pause in this market. It seems too obvious, but right now seeing where we've gone and how strong this rally has been — a pause would be fine. And you throw in the seasonality factor where April is the second strongest month over the last 20 years. Now we're coming into that slowdown. We didn't see it last summer, which was great. But this summer, rationale would dictate that we're gonna go away," said Jay.
Seasonality patterns also work over longer time frames. Callie Cox, senior investment strategist at Ally Invest, separately broke down what happens in year two of a fledgling bull market for Yahoo Finance.
"[I]t's typical for the bull market to lose a little bit of steam going into year two. And that's going back to the low expectations, high growth kind of thing. Expectations start rising and make it harder for the market to... beat everybody's expectations. And that leaves a greater chance for disappointment. And to be clear, again, we're not calling for doom and gloom. We just think the market is due for a breather up in the next quarter or two," said Cox.
Asked about what measures an investor might take to button up their investments as we head into the summer months, Woods highlights the importance of a diversified portfolio, adding, "With gains across the board, you may want to lighten up if that's your prerogative. But over the long term, these trends are phenomenal."
Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared