The ‘sell in May and go away’ phenomenon, recognised in Hong Kong markets as 五窮六絕七翻身, suggests that equity markets experience systematic weakness during May and June before staging a recovery in July. The Western interpretation extends this seasonal avoidance strategy throughout the entire summer period until September. This widely referenced axiom has influenced trading decisions across global markets for several decades.
Historically, many traders have systematically reduced their equity exposure during these months, operating under the premise that autumn and winter periods in the Northern Hemisphere provide superior risk-adjusted returns. This seasonal pattern has become so deeply embedded in market psychology that it is frequently treated as conventional wisdom.
Why does this seasonal pattern supposedly exist
Several factors have been cited to explain the supposed seasonal market weakness. Traditional Northern Hemisphere summer vacation schedules have historically resulted in reduced institutional trading activity, potentially creating lower trading volumes and heightened price volatility due to diminished market liquidity and support mechanisms. Corporate earnings reporting seasons typically occur outside these months, potentially reducing the frequency of market-moving catalysts and fundamental drivers.
Psychological factors play a role too. If enough traders believe in the pattern and act accordingly, it may manifest as a self-fulfilling prophecy through concentrated selling pressure during May.
What does historical data reveal
Comprehensive analysis of Hang Seng Index performance data spanning 2005 to 2024 fundamentally challenges the ‘sell in May’ narrative. Whilst May historically generates positive returns in only 35% of observed periods for the Hong Kong equity market, delivering an average monthly return of -1.4%, it does not represent the weakest performing month. August demonstrates inferior average performance characteristics, recording merely 35% positive return frequency alongside a -1.8% average monthly return. May exhibits a high/low ratio of 1.09 with average trading volumes of 38.3 billion, indicating robust market volatility and participation levels consistent with other calendar months.
June performance data reveals that Hong Kong equity markets have delivered positive monthly returns in 60% of observed periods over the past two decades, positioning June as the fourth most reliable month throughout the calendar year.
Table 1: Hang Seng Index monthly returns between January 2005 and December 2024