New Delhi: An old stock market adage says, 'Sell in May and go away'. It's the month of May again and investors tracking the historical patterns of the market may well be busy booking profits on their portfolios.
Market observers believe that the sell-off theory for May and a few more upcoming months is further supported by the need for a long-overdue correction on the bourses.
Even as the optimistic lot of investors may not be ready to buy this theory as the market has been showering gold for them and Sensex has gained 2.63 per cent in the first four trading sessions of May this year, most market observers believe profit-booking should be part of every intelligent investment strategy.
They argue that historical data and patterns also suggest sell-off at current levels.
The Sensex has been on a long record-breaking Bull Run over the last three years. In fact, in 2006 itself, the index has surged ahead more than 31 per cent, over a 42.3 per cent jump in 2005, and scaled a new lifetime high of 12,482.91 earlier this month.
An analysis of market movements in May over the past decade shows that the benchmark Sensex has given a negative return on four occasions. While it has managed to stay positive on other occasions, significantly it is only once that the return was in double-digits (in May 1999 during the dot-com boom) while it hovered in poor single-digits on five occasions.
Lending credence to the theory of profit booking in May is the average return for the month over the past 10 years from 1996 to 2005. This stands at 1.06 per cent and if the whopping 13.3 per cent return of May 1999 is excluded, this drops to a negative 0.3 per cent.
The May-effect formula, based on seasonal patterns of the equity market, has held true for several past decades across the Indian and global markets, with only a few exceptions.
The theory further advises investors to come back to the market in November, while terming the six-month period from May-October as a bad investment horizon.
Data shows that the trend has been followed even during the recent sharp upward rally on the bourses as the Sensex added a whopping 52.6 per cent from November 2005 to April this year, as against a relatively lower gain of 28.2 per cent during May 2005 to October 2005.
Not surprising, the difference was even sharper in the previous year with a gain of only 0.3 per cent in May-October 2004 against a jump of 8.5 per cent in the Sensex from November 2004 till April 2005.
A 10-year analysis of the market trends shows Sensex has given an average return of nearly 7.3 per cent during the May-October period against a return of nearly 13.3 per cent for the November-April period.
The 30-share barometer index of the BSE has given a negative return on six occasions in the May-October period over the past ten years while there has been only one instance of negative return for the November-April period.
This clearly suggests that the theory of 'in May and go away, but come back in November' is not based on mere superstitions but backed by some sound fundamentals and historical data, analysts say.
Analysts believe the markets tend to surge higher during November to April period as they are supported by a generally robust shopping season in November-December, year-end bonus announcements and tax related benefits and also the inflow of pension fund contributions into the stocks.
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