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Why Bears Don't Like the Summer

Mark Hulbert explains why investors shouldn’t worry that the seasonal summer doldrums are likely to lead to volatile declines.

Don’t sell a dull market short.

That famous Wall Street saying is good advice at any time, but especially during the summer when trading volume falls, volatility declines, and the stock market can seem downright boring. But a review of the historical record shows that it’s unwise to bet that the summer doldrums are an omen of imminent declines.

Let me set the stage by reviewing the data. First consider New York Stock Exchange trading volume, which regularly declines during the summer months. Many have failed to detect this drop, because the pattern only emerges when correctly slicing and dicing the data. For example, trading volume has trended much higher over the past century; as a result, if you compare June 2021’s trading volume to that of any non-summer month of prior decades, you’ll certainly conclude that it is much higher.

But focusing on the volume data this way paints the wrong picture. I instead measured each month’s NYSE trading volume since 1888 relative to its trailing 12-month moving average. A ratio above 1 means that the month’s volume is higher than the previous 12-month average, whereas a reading below 1 means that it is lower. Note that I also cut the analysis off in the early 2000s, since that’s when computer-driven trading (such as high frequency trading (HFT)) began to skew the trading volume data.

The table below reports what I found. Notice that the three summer months are the only ones in the calendar with ratios below 1.

MonthRatio of month’s NYSE trading volume relative to 12-month moving average (data from 1888 to 2003)Average VIX (since 1990)

January

1.13

19.33

February

1.07

19.60

March

1.06

20.24

April

1.10

18.89

May

1.06

18.31

June

0.97

18.36

July

0.95

17.82

August

0.94

19.24

September

1.05

20.45

October

1.08

21.77

November

1.13

20.44

December

1.12

19.45

As a double-check, I also included in the table the average VIX level for each month of the calendar. The VIX, of course, is the CBOE’s Volatility Index. Its average level during the summer months is 7% lower than that of the other nine months of the calendar.

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Summer Doldrums Are Normal

Now that I’ve set the stage, I want to address whether the summer decline in trading volume and volatility is a cause for concern. It is not.

One way I could try to convince you of this would be to review the complex econometric studies that have analyzed the price-volume relationship and failed to find a strong correlation. To be sure, only some academic studies have found that price leads volume rather than the other way around. Furthermore, some of those studies have found no causal relationship one way or the other. But the relevant takeaway for our discussion is that the price-volume relationship is difficult to detect econometrically, even if it exists in the first place. If it’s that hard to measure, I seriously doubt that traders need to incorporate it into their trading models.

For our purposes, focus instead on what I think is a very telling statistic: The proportion of past bear markets that have begun in the summer. That proportion is significantly lower than for other months of the calendar.

To calculate this statistic, I relied on a bear market calendar maintained by Ned Davis Research. The calendar extends back to 1900 and contains a total of 35 bear markets. The chart below reports the percentage of those 35 bear markets that began in each month. Notice that the summer months’ percentages are all below average.

Hulbert Chart 061621

That should go a long way to putting you at ease if you were otherwise concerned about the summer doldrums.

To be sure, neither this nor any of the other statistics mentioned in this column provides a guarantee that a bear market couldn’t begin this summer. What the data are telling us is that the summer is not a reason, by itself, for believing that a major decline is imminent.