Letting the Hot Air Out of the Popular ‘Summer Rally’ Theory

If it’s almost June, it’s time for the perennial talk of a “summer rally” on Wall Street.

Like other great myths, this one just won’t die.

The idea that stocks always stage a hot rally in the hot months has been around forever. Turns out it’s more than a little stretch of the truth.

Indeed, there is usually some kind of substantial rally in all four seasons, notes Stock Trader’s Almanac, an annual digest that tracks the market’s seasonal patterns, among other things.

But the summer rally is typically the weakest of the four.

Using the Dow Jones industrial average, and measuring from the index’s low in May or June of each year to the highest level the index reaches any time in the third quarter, the average “summer rally” since 1964 has amounted to a 9.7% gain, Stock Trader’s Almanac says.

But that pales compared with the average “winter rally.” Measuring the Dow’s gain from its lowest point in November or December to its highest point in the first quarter of the following year, the average winter rally since 1964 has produced a 14% Dow gain.

The average spring rally has produced a 10.5% Dow gain, and the average fall rally a 10.4% gain.

This is all just another way of pointing out that, for traders who can time the highs and lows, there’s always some kind of playable move going on in the market.

But recent history suggests that the better plays for traders may be in any season but summer.

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Seasonal Rallie

Summer rally? There almost always is one, if you measure from the Dow Jones industrial average’s May or June low to the third-quarter high. But then, almost every season has some kind of rally. And on average, the summer rally is the weakest, according to Stock Trader’s Almanac. Average gains in each season’s Dow rally, from trough to peak, since 1964:

Source: Stock Trader’s Almanac