As autumn arrives, an old market idea resurfaces: the best six months. It suggests that stock markets tend to do better from November to April than from May to October. It is closely related to the saying “sell in May and go away”. The pattern has some history behind it, but it is far from a reliable rule.
What the strategy says
The best six months strategy holds that investors should be invested in shares from the start of November to the end of April, and hold safer assets such as cash or bonds for the other six months. Researchers who studied long runs of data found that, in many markets, a large share of stock returns historically came during the November to April period.
Why the pattern might exist
Several explanations have been suggested. Year-end bonuses and new-year investment flows can bring fresh money into markets in the winter months. Fund managers may position for the new year in November and December. Trading activity often thins in the summer as people take holidays, which some argue makes markets more vulnerable to shocks. Company results and outlooks published early in the year can also lift sentiment.
November in particular has often been one of the stronger months for US shares, which is why the strategy gets attention at this time of year.
The limits
Seasonal patterns are averages, and averages hide a lot of variation. Plenty of summers have been strong and plenty of winters have been weak. Major events such as financial crises, wars or sudden changes in interest rates easily overwhelm calendar effects. Following the strategy strictly also means missing summer rallies, paying trading costs to switch in and out and, in some countries, triggering taxes on gains.
There is also a statistical concern. With enough data, it is possible to find patterns that are partly the result of chance. The more widely a pattern is known, the more likely investors are to act early, which can weaken it.
How traders use seasonality
Most professionals treat seasonality as one input among many. It may nudge expectations about volatility or encourage them to look harder for reasons to own shares in the winter months, but they still focus on earnings, interest rates and the economy. Our guide to seasonal market cycles looks at how trading conditions change through the year, and our latest Morning Market Brief shows how much else is driving markets as November begins.
The beginner takeaway
The calendar can hint at tendencies, but it does not decide what markets will do. If a strategy depends only on the date, it ignores almost everything that actually moves prices.
Knowing the difference between a tendency and a rule is part of trading with discipline. The Samuel & Co Trading Trader Assessment can help you find out where your approach is solid and where it relies too much on hope.
