By Atul Prakash
LONDON (Reuters) - Seasonal trading in equities has lost its luster in the financial crisis, with investors far less likely to "sell in May and go away" than to stay alert for bank busts, bailouts and central bank bonanzas.
The relevance of the century-old phrase suggesting a summer trading lull, along with others like "the January effect" and "year-end bounce" has diminished and, say many, is a relic of a world that has largely disappeared.
In today's less predictable climate, trading according to "seasonals" can prove costly.
The advice to sell in May dates back to the days when London's financial center, the City, all but ground to a halt as stockbrokers took off to enjoy the summer and attend events such as the Wimbledon tennis championships and horse-racing at Ascot, resulting in thin trade and muted investor returns.
By tradition brokers would be back at their desks in September after another horse race, the St Leger.
Times have changed. Investors selling the STOXX Europe 600 index in May and staying away until September would have lost money 60 percent of the time in 2008-12, compared with 44 percent of the time in the previous 16 years.
"The 'sell in May' is a smaller effect in a broader (market)movement," Ronny Claeys, senior strategist, KBC Asset Management said. "The financial crisis and the economic cycle slowing down or accelerating is a much larger effect at a time when the economy is increasingly in the hands of the central bankers."
This year, patchy economic data has raised expectations of more global central bank stimulus in coming months, with the European Central Bank cutting interest rates on May 2 and leaving the door open for more action if needed.
Such moves from central banks, which have already injected massive liquidity into the market, could fuel a stock rally during the holiday-thinned summer, analysts and investors say.
"Earlier the market used to be driven by internal liquidity, but now we are witnessing a lot of external liquidity as we are under the spell of central banks," Didier Duret, global chief investment officer at ABN-AMRO Private Banking, said.
"Hold in May and don't go away."
The January effect - a market boost often attributed to investors taking more risk as funds' performance metrics are re-set to zero as the year begins - is also becoming less marked.
In the 16 years to 2007, the STOXX Europe 600 gained in January in 69 percent of cases but in just 40 percent of cases over the following five years.
A similar picture holds for the UK's FTSE 100. Three decades of data show a positive January 65 percent of the time in the 23 years through 2007, against 33 percent since then.
"In my view, these are trite old phrases which can resonate but should never be relied upon. We do still see a summer fall off in volume, but no house wants to be caught short or caught out these days," Justin Urquhart-Stewart, investment director at Seven Investment Management, said.
But the old ways are still relevant to some.
Speculative and retail players are usually more inclined to follow seasonal trends when other external variables are dormant. Long-term players generally pay less heed to these theories and base investment decisions more on company and economic fundamentals.
According to IG Markets, about three-quarters of its clients, mainly retail investors, are "short" the FTSE 100 - betting on a fall in the coming months. By contrast, Markit data shows that of the FTSE 100 shares available to lend, only 2.8 percent are on loan, mainly to "short", indicating few professional investors expect a weaker market ahead.
"Not a lot of professionals actually trade (seasonally). It is more something that is in the back of people's minds and has the potential to tip the decision in a certain direction when all the other arguments balance each other out," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
(Editing by Nigel Stephenson)