DEBUNKING THE MYTH OF THE ‘SUMMER RALLY’
Market can’t be both stronger and weaker during one season
Summer is fast approaching, and that means you should brace yourself for an onslaught of Wall Street sales pitches based on a socalled “summer rally.”
Like most of Wall Street’s supposed seasonal patterns, however, the summer rally turns out to be yet another urban myth.
That doesn’t mean the stock market won’t rise sometime during the summer. It undoubtedly will, just as it will also fall back at some point. In this trivial sense, we can predict with certainty that there will be a summer rally.
But the analysts peddling the summer rally have something more in mind than this, and that’s where they are on shaky ground. The rallies the stock market experiences during the summer are no stronger or more likely than those that take place during other seasons. According to the Stock Traders
Almanac, the “summer rally” traces at least back to the late Ralph Rotnem, who prior to his death in 1973 had been a partner at Harris, Upham & Co., a brokerage firm.
He defined it as the rally from the lowest close in the Dow Jones industrials during May and June to its highest close in July, August or September.
On first blush, such a rally is impressive.
Since the late 1800s, when the Dow was created, the average year’s summer rally has been 13%.
Assuming the Dow’s May-June low already has been registered, and assuming this year’s rally lives up to historical norms, that means the Dow will trade at 23,625 at some point this July, August or September.
Before you rush out to load up your portfolio with more stocks, however, bear in mind that it would be next to impossible for any of us to turn this theoretical summer rally gain into a realworld profit. That’s because we only know after the fact which will be the Dow’s closing low in May or June and which will be its closing high during July, August or September.
If we had the prescience to know that, we wouldn’t need a supposed summer rally to be making a killing on Wall Street.
Furthermore, other months of the year can claim a bigger profit potential when defining a rally in the same way Rotnem did.
To be sure, the differences between the various months’ rally potentials are not significant at the 95% confidence level that statisticians typically use for determining whether a pattern is genuine.
But that still means there’s nothing special about any rally that comes in the summer months.
Not all advisers measure the summer rally in the way specified decades ago by Rotnem. But none of the alternate definitions I have analyzed has fared any better.
It’s ironic that Wall Street would try to peddle the notion of a summer rally since another of the alleged seasonal patterns that analysts make a big deal of every year about this time is the socalled “sell in May and go away” indicator.
This latter pattern is based on the supposed tendency of the stock market to turn in its weakest returns between May Day and Halloween. Needless to say, the stock market can’t be both stronger than usual and weaker. Has Wall Street no shame? (For the record, as I pointed out a month ago in these pages, the “sell in May and go away” indicator has existed only in the third years of presidential terms. In the first, second and fourth years of past presidential terms, the pattern was non-existent.) The bottom line? Stocks will rally at some point this summer. And they will also pull back. For most of us, the best advice remains to focus on buying and holding a diversified basket of good-quality stocks for the long term.