03 May 2016 21:43 IST

Sell in May and go away

Sensex and Nifty may be exceptions to the old notion regarding stock markets

Will you sell in May and go away? This question makes headlines every time global financial markets enter the month of May. What is this all about?

This is an old saying pertaining to the stock markets. Historically the six months between May and October (both months inclusive) is considered a period of under-performance. Similarly, the other half of the year, between November and April (including both months), is seen as a time of outperformance. So, there is a tendency among investors to sell their stocks in May and book profits, ahead of the lull. Similarly, they tend to buy in November to make money in the rally expected to be seen between November and April.

Much maligned May

But is there a deluge of selling in May as investors stampede to exit in time? Not really. Analysis of historical data of major global major indices over the last quarter-century paints a mixed picture. TThe Dow Jones, Nasdaq, S&P 500, Shanghai Composite, Nikkei, and DAX, along with Indian indices such as the Sensex and Nifty 50, were studied from 1991.

The theory of ‘sell in May and go away’ has gone wrong in the last three consecutive years (2013 to 2015). All the indices, barring the Nikkei and DAX, had registered a positive return in May over the last three years. Nikkei gave a negative return in May 2013 while DAX in May 2015. The Indian markets offered an average return of 4 per cent while the US indices notched up a 2 per cent return in May in these three years.

History suggests that May is not too bad a month for most indices. Only the Nikkei has closed in the red about 54 per cent of the times. For the Indian indices, the ratio is exactly 50-50; for positive and negative closing in May. In the US, the ratio of negative closes was 35 per cent, and in Europe about 42 per cent. In short, May is not necessarily a scary month for the markets.

Period of outperformance

But history proves that the period between November and April is definitely a period of out-performance when compared to the other half of the year, May to October. There is a huge gap in terms of the return between these two periods, especially in developed market indices. For instance, the US indices, Dow Jones and S&P 500, had recorded an average return of about 7 and 6 per cent respectively in the November to April period. But both these indices had been a laggard in the other half of the year, during which they had averaged a 1.5 per cent return. Nasdaq has turned in almost equal returns in both these periods.

In Europe, DAX registered a negative return of 0.3 per cent between May and October, while it earned around 10 per cent in the November to April period.

China could be one best destinations to invest in during November. China’s Shanghai Composite index has posted a whopping 20 per cent return during November-April and a 4.6 per cent return in the other half of the year.

But the Indian benchmark indices, the Sensex and the Nifty, seem to be an exception to this rule. There isn’t much difference between the returns obtained over these two periods. Both the benchmark indices have returned over 10 per cent, on average, from November to April, and over 7 per cent for the May-October period.