Looking back, the “sell in May, go away” adage has actually proven to be quite consistent over the past 50 years. It was first noticed in U.S. markets, but seems to have held true in Canadian and European markets as well.
One explanation why this might be true is because of investors cashing in on their investments in May so that they can take the summer months (normally June to August) off and chill out.
Another reason may be that stock markets tend to perform well from November to April (earnings season, anyone?), then taper off from May to October. With stock prices peaking in April, some traders decide that it’s just best to book some profits the following month.
You might be asking, “Mr. Gump, doesn’t this only apply to the stock market? What about us forex traders?”
Well, if you were carefully paying attention when reading our School of Pipsology lessons, you’d remember that the equities and forex markets are normally highly correlated. Digging a little deeper, we can in fact see that the old adage has held true in the forex markets as well.
If you look at the monthly charts of both EUR/USD and AUD/USD, you’ll see that the month of May has been very bearish for the past three years. In fact, EUR/USD and AUD/USD experienced their largest monthly losses in May for both 2010 and 2012. Moreover, if you drill down to the smaller time frames, you’ll also see that it wasn’t a one-time thing. The pairs declined steadily throughout the month.
“If it happened in the past three years, it should be true, right??”
Hold up! Don’t get too excited just yet.
Remember that NOTHING is certain in the markets. You should know by now that the past doesn’t necessarily predict the future. Heck, if that were the case, trading would be a piece of cake and we’d all be millionaires!
The market environment changes year after year. Themes and factors that dictated the previous years’ selloffs may not be present in 2013.
So don’t get too caught up with this adage. The worst that could happen is for you to be too engrossed in it that you purposely miss out on obviously bullish trades that you would have otherwise taken.
While the “sell in May, go away” superstition certainly gives us something to consider when trading, I think that you would have a better chance at growing your account if you stick to good ol’ hard work. So remember to always conduct your own research and analysis, and make sure to factor in the CURRENT market environment when formulating a trade plan!