The Other Side Of 'Sell In May And Go Away'

“Sell in May and go away” ranks near the top of Wall Street idioms. And though the idea that long-term investors are best-suited rotating into cash for the summer months and buying back into stocks in the fall has been debunked many times, there is some truth to the saying, depending on how you look at it.

It is an observable fact that the summer months are the lightest on Wall Street in terms of trading volume. Why this occurs is anybody’s guess, though the common thinking is that many retail investors simply take a break from the markets in the summer.

Whatever reason you want to ascribe to the quieter summer, it does have implications for the active traders who stay with the market, according to Sylvia Jablonski, managing director of leveraged ETF provider Direxion.

“There’s a thought that a lot of the longer term investors take a break from trading, and what we do see at Direxion is the short-term traders who have a short, precise holding of a day or two, they love this time of year. We tend to see more volatility when there’s less trading and liquidity,” she said.

Jablonski noted that the lower volume can create opportunities for short-term traders to take advantage of price discrepancies in an under-crowded market. The average holding period of Direxion leveraged products during the summer, she said, shrinks from two to three days to about one day.

“We’ll just notice that the holding periods really shrink, and I think that’s because of the lowered volume, which could be perceived as less liquidity,” she said.

Jablonski couldn’t offer any hard dates for changes in volume, but she said anecdotally it tends to drop from late May-September. She said she has observed that the less competition, particularly among model-based traders.

“I’ve read enough of this stuff to say we don’t really know why, it’s just logical that less people are trading because more people are away. So when we see big pops randomly in July, we assume it’s a model guy or an [arbitrage] guy, and not a longer-term investor that’s come home and taking a view on something short-term.”

It’s interesting that this period of lower expected volume comes on the cusp of the recent escalation in trade tensions, which have caused a sudden increase in volatility to what had been a pretty quiet April.

While earnings season contributed to some added volume—Jablonski said the Direxion Daily Semiconductor Bull 3X Shares SOXL and Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares UBOT both experienced a 100 percent month-over-month increase in average daily trading volume in April—the macro front hadn’t changed much prior to May.

That’s not the case anymore, however. If anybody is happy to see added volatility, it’s short-term traders. Whether the trade tensions stay escalated through the summer will go a long way in determining how they approach the typical summer doldrums.