Myth investing

Rallies and Reversals

Myths have been a part of life as long as we’ve been able to communicate. From campfire tales to sage words of advice, myths have been used over the years to teach, to share, and sometimes to create healthy fear. 

Most of the time, we adults understand that behind the stories lies a nugget of wisdom and experience. There are times though, when we forget the true intent, and take the words literally. 

Investment myths are often accepted as truth, but in reality are simply ways of creating a sense of predictability in an otherwise unpredictable world. Just as a broken watch is always right twice a day, so too are investment maxims right sometimes.

The Summer Rally

Investors and traders start talking in May about the summer rally as though it is a specific set of dates. Typically a summer rally will last about three weeks, and falls between June and August. While this may be true, what’s difficult to predict is the three weeks when it will happen. And, to the credit of the other three seasons, there is generally a three-week rally in any of those other periods as well.

Sell in May and Go Away

This myth originated from a period of seasonal strength that was typically seen in the base metal sector. Base metal prices, as well as their equity counterparts, would peak in May and then decline through to September. 

This was actually a result of lowered demand by the European base metal smelters as they took operating shutdowns for Europe’s extended holiday season. While still reflected in prices, the pattern has been muted as smelter capacity has decreased in Europe and grown in the Far East and South America. Along the way, the financial media adopted the phrase and used it to to project the pattern onto the broader markets. Unfortunately, the historical data does not support the trend.

October is the Most Dangerous Month of the Year for Investors

This myth is based on the fact that we’ve experienced two of the most dramatic market downturns in history in October. The years 1929 and 1987 will forever be in the collective memory banks of traders. The problem is, the S&P has risen in five of the past 10 years in October and the TSX seven of the last 10. In reality, October is more often a seasonal bottom, and a good time to be buying.

The Santa Claus Rally

Near and dear to our hearts, is the Santa Claus rally. Whether it’s because we get that boost to our portfolios at the end of the year or just because good things should happen at Christmas, we like to believe that the trading days between Christmas and New Years will result in a rally. Traders will often start buying after December 15th and carry on through the early days of January, if markets are good. While not always true, more often than not, December is a bullish month, the last week in particular. This leads us to what is known as the January effect, or as the traders often say, ‘as January goes, so goes the year’.

So if you’re tired of all the research, the hours of technical analysis, and the pile of income statements and balance sheets in front of you, and you just can’t make the call, maybe its time to chuck the common sense approach and take a flyer on a myth or two. Not.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.