The old adage says “Sell in May, go away, come back on St Leger’s Day”, based on the theory that equities underperform in Summer. With the eponymous Doncaster horserace set for this Saturday, and the UK 100 well off May’s record highs, are we set for a seasonal rush back into equities?

In some ways the theory was wrong. In May the UK 100 rallied another 5.3% (building on a 9.3% rebound from March lows) to hit fresh record highs. On the other hand it was correct. The index gave up all those May gains by mid-June, to trade relatively sideways through July before falling another 7% since early August. For the trading adage period, the index is -2.7%.

But this is a rather simplistic way of looking at it. Yes, you might have lost money had you done nothing with a UK 100 position. On the flipside, you would have missed several attractive trading opportunities of +5% (1-22 May), -5% (23 May – 26 Jun), +4% (26 Jun – 8 Aug), -7% (8 Aug – today). Along the way there were also multiple smaller, but very tradeable, opportunities to be had. And these stats are for the index as a whole. With its 100 components, the opportunities on offer this summer were in abundance.

One could assume that less people trading (because they are off sunning themselves on the continent) means lower volumes, which can increase trading uncertainty, meaning more risk. This can be the case around Christmas. But don’t forget that the above adage dates back to a bygone era when aristocrats, merchants and bankers would flee the city of London for cooler summer climes. There may well be a quieter period in current summers, but most take a fortnight at most. And modern trading volumes are now so much greater, the impact is less.

In fact, average daily trading volumes on the UK 100 during the summer period (1 May-today) fell just 0.4% versus the daily average of the Jan-Apr period. Interestingly, however, on the volumes actually increased by 13% during the summer, suggesting more interest in mid-cap UK stocks rather than big blue-chip names.

Trading volumes on the UK 100 jumped 19% in May as the index hit record highs. volumes rose in tandem, +14%. However, June was quiet, with UK 100 volumes flat, while those for the reversed, dropping by 16%. July saw big drops for both (offsetting the May jump), -21% and -13%, respectively, as markets traded sideways. August was also quiet (-3% for both) as market dropped on trade war fears and September so far sees volumes flat. However, the has already seen a resurgence of interest with volumes +14%.

With both indices having fallen since August (UK 100 -7%; -4%) from August highs and both already up 1% to 1.5% from recent lows, is the offering a signal of renewed interest via its trading volumes?

We have already identified 50% of UK 100 names with higher average daily trading volumes in September than August. To name but a few, Barratt Developments +89%, Shire +69%, easyJet +45%, Rolls Royce +34%, Antofagasta +29% and Marks & Spencer +27%. All posted an average of 13% lower volumes in August vs July, some as high as 40% less. So are we seeing a seasonal reversal? Was it obvious?

Just as technical indicators allow us to identify trading opportunities (overbought/oversold, momentum rising/falling, etc) via the price, analysis of volume is also very valuable, allowing us to spot signals of fresh interest in trading shares. More trading implies a more interesting price point for both buyers and a sellers. This may imply an inflection point and a valuable trading opportunity.

With over 75% of the UK Index in negative territory since August, perhaps traders should look not just at price for confirmation of a tradeable rebound, but for a volume jump as an early heads-up that the shares may be set to follow suit.

To stay on top of the UK Index ‘s price and volume trends, get access to our award-winning research (set for an exciting overhaul next week) and let us help you navigate the flat or jumps, whatever the course/market conditions.

Mike van Dulken, Head of Research, 14 Sept 2018