Why Traders Need To Be More Selective During Summer Months

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There is reasonable evidence that suggests the six months between November and the end of April are the best time of year to trade stocks.

The November-April period has historically outperformed the six months between May and October period for stocks across many countries and time periods.

This phenomenon has been recorded across numerous countries and three centuries of United Kingdom data. Sometimes, this is referred to as the ‘Halloween indicator’ or the ‘sell in May and go away’ rule.

In this blog post, we will look at why the stock market performs poorly in the summer months and why traders should be more selective during these months.

Why do stocks perform badly in summer?

Summer months are often characterized by low volumes and sometimes lower volatility in the stock market. This is because most stock traders sell their shares in May to come back after the summer.

Therefore, there are fewer traders active in the market during the summer months.

to research and data compiled by Bloomberg, internationally and for the US stock market, the winter and spring months after the traders have returned from their summer holidays have historically yielded better compared to the rest of the year.

Historically, the key times when market players are optimistic and resilient are the end and beginning of the year.

On average, stocks post returns of about 2% during the summer, compared to nearly 7% in the winter months, according to the data. Although this is not always the case each year, the data is statistically important and huge returns are recorded over 60% of the time during winter.

This research is based on the S&P 500 Index, which tracks 500 of the biggest American companies. Market indexes of other countries have also been seen to have a similar pattern.

However, it is worth keeping in mind that this effect is relevant to exchange-traded funds (ETFs) and index funds, not to individual stocks.

To sum up, it seems over a long period of time, there is an average underperformance during the summer months for the stock market and an outperformance during the winter months.

That’s why it is important for traders to be more selective during summertime trading since the season tends to be slower.

When trading during the summer months, you need to focus on what can help you avoid losses when the market is experiencing a decrease in liquidity and volatility.

Let’s take a look at a few important rules you should follow in your daily trading activity in the summer.

  • Focus on trading just a single strategy: Focusing on a single strategy when trading stocks during the summer months means you won’t get distracted trying to hunt for many different setups. Being great at applying just one proven to be successful strategy can give you better results than attempting to mix up many of them in the long run.
  • Don’t trade more than one stock at a time: This is an important point to remember, especially when you are applying a strategy where the average holding time is as little as a few seconds or just a few minutes. The last thing you want to do is trying to trade two or more stocks simultaneously.
  • Stop trading after 11:30 am: Momentum in the stock market tends to be really hot during the first two hours after the opening bell. This applies even more to small-cap and lower-priced stocks that trade below $10. That’s why it is a good idea not to make any traders after 11:30 am so that you can focus on reviewing your trades for the day.
  • Don’t take more than 5 trades per day: Statistically, you are likely to lose much more money when you make more than five trades per day. By following this simple rule, you can avoid repeating the pain of your worst days.
  • Don’t trade during the pre-market session: The best time to prepare for the trading day is before the opening bell rings. Pre-market sessions usually have poor liquidity and this often causes wider spreads and bad fills because of slippage.

Besides, the last thing you want to do is kick off your day when you have already lost some money after executing a trade during the pre-market session.

This can have an emotional impact on your ability to find the best opportunity when the normal trading session begins.

  • Use only β€œA” quality setups: Once you’ve observed the rules above, this one will be easier to follow. Your bottom line mindset always has to be this one: every single day you are not forced to enter even a single trade. This approach can greatly help you to filter out any setup that doesn’t carry the high potential/small risk ratio required to get into a trade.

A catalyst refers to something that is moving a stock. Fortunately, catalysts don’t respect seasons of the year and they often happen during the summer months.

Besides following the rules above, individuals trading in the summer months should also be on the lookout for stock catalysts. A stock catalyst refers to any event or news that causes an increase or decrease in the price and volume of a stock.

Here are a few stock catalysts that you should watch for a profitable summer trading season.

Popular catalysts to watch in the summer period

  • Company earnings – Many public companies announce their quarterly financial results during the summer. These earnings tend to lead to significant market movements.

Generally, stock prices move up in response to earnings reports that beat expectations (and vice versa).

  • Management changes – A stock can also experience high volatility when the company announces a change in its board of directors or management. For example, a stock might jump higher if the departure of an underperforming CEO is announced.
  • Mergers and acquisitions – Mergers and acquisition deals are a common thing in the stock market and can be announced any time of the year. When such deals are announced, they tend to lead to volatility in the stock market.
  • Social media – Social media can also drive the stock market. A good example is when retail traders gathered on Reddit and other social media sites in 2021, and pushed stocks such as GameStop (GME) and AMC (AMC) to record highs.

Bottom Line

As a trader, your job is to constantly adapt to the ever-changing environment of volatility, liquidity, and price action.

The stock market tends to experience low volume and at times low volatility during the summer months. However, this period is not completely a terrible time to trade.

While liquidity and volatility are usually low in summer, there are plenty of opportunities that arise that can help you make profitable trades.

When trading in summer, you need to be more selective since it’s slower and be on the lookout for stock catalysts. More importantly, keep in mind that the principles of price action and technical analysis are always in play.

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