Sell In May and Go Away: A Grain of Truth

- May 10th, 2011

As cyclical demand fluctuates for many commodities, traditional investors, speculators and hedge funds tend to enter and exit the market in anticipation of a build-up or slowdown in demand, giving some weight to the claims this adage is in reality a good predictor of the seasonality of investment demand.

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Is there any truth to the centuries-old market adage, “Sell in May and Go Away, Don’t Come back ‘till St. Legers Day,” or is it simply an old wives tale, an investing half-truth?

The saying relates to the slowdown in the summer months of many markets, which don’t pick up in trading volume until around the St. Legers horse race in mid-September. Certainly there is some statistical data that backs up the phrase—and some that discount it. In the metals markets, there are a few cyclical factors that are at play—including weather, summer holidays and factory shutdowns—that affect the consumption of various hard commodities.

In an exclusive interview with Resource Investing News, Wayne Atwell, Managing Director of Research with Rodman & Renshaw, speaks about the factors behind this phenomenon in the metals markets. As cyclical demand fluctuates for many commodities, traditional investors, speculators and hedge funds tend to enter or exit the market in anticipation of a build-up or slowdown in demand, giving some weight to the claim this adage is a reliable predictor of seasonal investment demand.

“The bad weather in the winter leads to curtailment in construction, so there is less demand. When the weather improves, construction activity starts heating up. Manufacturing picks up, companies start buying, and metals markets start moving,” explains Mr. Atwell. “But there is a limited period for metals to rally. Six to eight weeks is the typical period for a metals rally.” Many such slowdowns and rally periods are a regular part of bull markets, which can go on for years as we have seen in the gold market.

The demand slump in the winter translates to lower prices, and therefore many investors will buy in the period leading up to the spring when manufacturing firms start to ramp up production, consuming more metals. This period from March to April tends to see a rally for many base metals. However, shortly thereafter, in May investors anticipate a slowdown of manufacturing, and sell their commodities holdings.

“A lot of manufacturers will shut down for two weeks during the summer period. Steel processors, and the auto industry shuts down usually in August/September, so demand will fall off because there is anticipation for these shutdowns. Once you roll into September, usually vacations are over, and plants come back to full capacity. After the 1-2 month correction in prices, investors jump back on the bandwagon. Metals usually have two runs during the year, one in the spring and one in the fall,” stated Atwell.

Many of the metals that are used in construction are affected by this cyclical pattern, of which Mr. Atwell pointed to a few. “Zinc is used in construction a lot as are lead and copper, and to a lesser extent, aluminum.” Steel, and many of the base metals used in the production of steel alloys such as molybdenum, manganese and vanadium may consequently be affected as well due to shutdowns at auto plants.

Other factors may be in play this year, including the dramatic pullback in precious metals. “Silver has corrected, and that drove down some of the other commodities. So you may have one or two commodities that are drivers, but then the others go along for the ride,” stated Atwell. “More recently, momentum players are exaggerating the short term moves in commodities.”

The adage “Sell in May and Go Away” is supported by statistical data, for example, “A £100 investment in the UK market in 1991 would have grown to £162 [in 2011] for a buy and hold investor and £190 for someone following the Sell in May method,” reported Fidelity International Investment Director Tom Stevenson, for The Telegraph.

This doesn’t mean to completely abandon the market, as there is still money to be made with the right investments. In fact, in certain individual years this theory has proven to be completely wrong. However, over the long run, these cyclical factors are something to take into account in determining when to enter and exit the market.

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