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By Sarah Modlock

The world is full quaint superstitions and customs. Black cats for luck, a lone magpie for misfortune. Perhaps you throw salt over your shoulder if you spill it, or throw coins into the Trevi fountain to ensure you will return to Rome. The City has its own traditions but few are more increasingly contentious than the old adage 'Sell in May and go away; don't come back 'till St Leger's Day' which prompts investors to sell their stock in Spring when the market is expected (by some) to dip for the summer.

Saint Leger lived about 1400 years ago and lots of incredibly nasty things happened to him as part of his martyrdom. His feast day is 2 October and it is from this point in the year that the custom says you should begin to invest again.

In the US, it is called the 'Hallowe'en Indicator' but adopts the same principle. Although dismissed by many as nothing more than a superstition, in the past analysis has shown that the effect has indeed occurred in almost all countries examined and is strongest in Europe. Those who do take notice say the effect may be caused by summer holidays and maintain that the 'sell in May' strategy is stronger than holding stocks all year round.

Does it work?
It certainly worked in 2004 when stock market returns were only 0.3% over the four summer months. However the year before, the stock market bucked this trend and rose by +10.2%, but this was largely due to the end of the war in Iraq. During the last decade, only six (of the 33) stock market sectors make at least one third of their annual returns in the middle months of the year (May to August). These include 'Steel & Other Metals', 'Electricity', 'Automobiles & Parts', 'Food & Drug Retailers', 'Household Goods & Textiles', and 'Transport' - all traditional defensive sectors.

So could this market timing strategy be a sure fire winner? "The best advice is don't bet on it," says John Bearman, Chief Investment Officer at Santander Asset Management UK. "The theory is that markets are more likely to lose ground over the summer months when traders and brokers loosen their ties and take time out to sip Pimms on the riverbank at Henley, eat strawberries at Wimbledon and gently roast themselves on Mediterranean beaches. Only in September, when the major market players are back at their desks will activity levels begin to pick up again. The idea of a long lazy summer away from the office may be alluring but it is not something many of today's City workers would recognise. Markets are global, highly competitive and pay no heed to the English summer social season. A company which relaxes anything other than its dress code over the summer months is not going to succeed."

Bearman concedes that there will of course be years when the market does sell-off over the summer. This happened in 1998, 2001 and 2002. "However, in other years there will be solid growth: witness 2003, 2004 and 2005. Last year, returns for the period were almost flat but anybody who got out of the market in May would have missed the opportunity to buy at the market bottom during June, after a fall of 10%," he says. "So if you fancy a punt, why not study the form of the 2.40 at Ascot and get yourself down the bookies? The St Leger's Day adage is a quaint piece of Olde England, rolled out at on an annual basis in the financial pages of newspapers but for investors it is as useful as a clotted cream tea."

Dollar-watching
Another school of thought looks to the US dollar for its clues on when to sell. New research reveals that a weak dollar is one of the best buy signals around. And with the dollar close to record lows against both sterling and the euro, this indicator signals that the FTSE 100 could hit its all-time high of 6,930 before the autumn. In other words, not a good time for investors to 'go away'. The Footsie has gained 5% so far this year, closing at 6,555.55 at time of writing, after recovering from its February and March slump.

Watching the dollar-euro exchange rate may not be as well known as 'sell in May' but it could prove to be more accurate. Figures show that since 1989, when the rate has been below average, the market has risen in the subsequent six months eight out of ten times, making it one of the best stock-market predictors around. The average rise has been 5.5%, but the weaker the dollar, the bigger the rise.

Economist and Investors Chrionicle writer Chris Dillow, who conducted the research, said: "On the one hand, May is approaching, so it's nearly time for us to sell shares. On the other hand, the dollar is weak and this is traditionally a fantastic buy signal. With the greenback at E0.74, this implies the index will rise 7% in the next six months, which means it could hit an all-time high. There's a very simple reason why the dollar predicts returns. It's a great measure of investors' appetite for risk. Because America has such a big current-account deficit, a strong dollar signals a high appetite for risk and therefore low subsequent returns. The reverse is also true."

Dillow estimates that a seasonal investor - one who was in shares from October 31 to April 30 and in cash the rest of the time - would have grown £100 into almost £78,000 between 1965 and now. He says that £100 left in the All-share would have grown to just over £24,000.

David Buik at Cantor Index agrees that this is not a year to 'sell in May': "The Footsie is unlikely to fall back given the quality of company earnings on both sides of the Atlantic, the amount of takeover activity out there and the continued growth in China and other developing markets. However, for the index to hit 7,000 by the end of the year, some of the takeover deals being so eagerly talked about must come to fruition," he says.