“Sell in May and Go Away” they say. From a defensive investing perspective, the last few summer’s go some way to justify this statement. From a trading standpoint, the volatility of the last few summers has been a god-send.
Lower liquidity in the summer means there are fewer market participants with an opposing viewpoint to counteract sudden bursts of volatility. The volatility has often focused market attention on serious problems at hand.
The summer of 2016 is not quite over but it’s already seen some substantial volatility. FTSE 100 trading volume in June surrounding the EU referendum blew out to £25.7bn whilst the political turmoil in its wake saw a volume of £20bn in July, substantially higher than a 12-month average of £16.7bn.
As it stands, August looks like a substantial slowdown with a volume projection of about £15bn. A new Prime Minister and action from the Bank of England has calmed nerves and allowed a few much-deserved holidays to the South of France.
The bursting of the Chinese stock market bubble last year sent shares on its main index the Shanghai Composite crashing 30% and it took the delisting of half of the companies to halt the decline.
The shockwave caused a flash crash across global equity indices in August 2015; The FTSE 100 dropped almost 1000 points (15%) in two weeks.
In the summer of 2014 oil prices fell sharply to the lowest in a year when expanded shale oil production in the USA caused the huge supply glut we are still dealing with today. By September, when OPEC decided not to cut its oil output to defend prices, the bottom completely fell out. The price of Brent crude oil went on to fall over 50% from peak to trough in 2014.
At the same time there was a massive rally in the US dollar. In August 2014, EUR/USD closed below its 200 week moving average and plummeted 400 pips in three weeks. The pair went on to lose 3000 pips by March 2015.
It was August 2013 when the European debt crises came to a head. In a far cry from the current low interest rate environment, yields on “peripheral” European government bonds skyrocketed. The yield on Portuguese 10-year government bonds reached over 13% whilst in Greece it was almost 30%!
It was a rocky ride for the euro as well. From 1.45 in August, EUR/USD dropped 1300 pips to 1.32 on fears that Greece may be forced out of the Eurozone, causing an eventual break-up of the single currency. In October, EUR/USD rallied back to 1.42 as European banks and investors repatriated their foreign currency back into euros.
For the most part, the reason for trading financial markets is to catch the big moves. The last few summers have had their fair share of big moves.
Fears that the Fed may begin hiking rates, US elections, Chinese currency devaluation, an Italian bank flare up and Brexit are some of the reasons investors could still decide to collectively pull the plug on markets. If the market your trading starts taking out significant price levels, definitely don’t assume the move can’t continue because its summer.
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