Anticipating Seasonal Equity Trends

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By Greg Peel

Have you ever tried to hail a cab, only to have some guy walk 20 metres further down the road and grab the first one?

So it is proving with equity markets. The expression "sell in May and go away" has become a hackneyed one in these past few weeks of equity market correction – in hindsight, of course. Those who did sell are laughing, and those who didn’t will know better next year. This will work if the rule is upheld, but then again some wily investors might decide it would be safer to sell in April and beat the rush.

GSJB Were made an observation last month that in the Australian equity market the long-standing trend has been that June is a down month, but that in the last couple of years June returns have actually been mildly positive.

June is typically the month for "tax-loss selling" as investors take the opportunity to divest of their poor performers in order to offset tax payable on the performers ahead of financial year-end. However, Weres concluded that such selling now appears to begin in May, suggesting investors are trying to get the jump on the market.

These sellers then run into the "sell in May" school and it all gets a bit nasty – as it did.

Credit Suisse has noticed a similar trend shift in the US where January used to be the month investors would take a post-holiday decision to reinvest their portfolios, resulting in a trend of positive January returns. This now happens in December instead.

October is another month investors have long feared, given both the ’29 crash and the ’87 crash occurred in this month. A mild crash in ’89 was driven by fundamentals but many believe it was exacerbated simply because it was October.

Should investors square up in September?

Credit Suisse has used its analysis to find that for emerging market investors, there has been a similar trend shift. The trend used to be that the third quarter, the period containing the July-August northern summer break, used to be a down period for emerging markets. As they are volatile beasts, it’s probably easier to relax on holiday if you have squared off such positions before hitting the beach.

CS now finds that over the past two years, this third quarter trend has shifted into the second quarter, and that the third quarter is now a rallying period for emerging markets.

If this trend in trends becomes trendy, perhaps the call is buy emerging markets now.

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