Since summer is officially here, you may have heard the famous phrase - Sell in May and Go Away. Every summer around now, you may have also come across another popular seasonality trend - summer doldrums.
The summer doldrums refer to the period from July to Labor Day when the stock market is more volatile because investors go on vacation. As volume dries up during the summer months, the lower-than-normal liquidity in the marketplace can also lead to a high degree of market volatility.
The question then becomes - is summer doldrums a reality, or is this perception?
It may not matter to many investors in today's digital age, where financial markets are globally interconnected. Investors can trade electronically from almost anywhere in the world, including from their respective summer homes. Although summer doldrums may be more perception than reality, it still plays an important psychological role in today's stock market.
The onset of low liquidity and high volatility during the summer can either be a blessing or a curse. It is a blessing when the lack of liquidity can ignite explosive rallies, forcing money managers and professional traders to chase returns. It can also be a curse when the lack of liquidity during the summer may also lead markets to grind lower, triggering stop-loss executions and short selling.
It is debatable as to the significance of the summer doldrums. Many consider this an exercise in futility, especially if you are a long-term investor and not a trader. Nonetheless, from a technical perspective, we recommend investors and traders respect the primary trends as these dominant trends will likely prevail over the near-term fluctuations and swings that may occur during the long, lazy, hazy, crazy days of summer.