Sell in May and go away returns: This strategy will not work; here is how you can benefit

It may be time to dump the ‘sell in May and go away’ market wisdom. Instead, it should be replaced with ‘buy in May and laugh all the way to your bank!’ Research shows that the month of May has typically provided an attractive buying opportunity in form of cyclical lows for India’s stock market. In last two decades, 75% of the times, buying at May lows, has generated positive returns over the next six months for investors who swam against the proverbial tide. With Karnataka witnessing an all-important state election this May and announcement of result expected on May 15, investors may again get an opportunity to make decent money if the outcome is not in sync with market expectations, say analysts. Also, while the earnings season has seen good results from information technology (IT) companies and some banks, disappointments later can lead to wild swings in the market, they added.

The ‘Sell in May and go away” adage is based on an assumption that stocks typically underperform during May-October period. But research does not lend much credence to that assumption. A close examination of the performance of NSE Nifty index over past twenty years suggests that in fact, May has offered a decent buying opportunity for investors. In 75% of the times, year-end returns as calculated from May lows has been positive.

Data compiled by ICICI Direct Research shows that for all calendar years between 1998 and 2017, buying at the lows hit in May has generated positive gains in 15 out of 20 times. Buying at May lows in some of the years generated solid returns of 20-70%. For instance, buying at Nifty lows of 9270 hit in May 2017 clocked nearly 14% gain by year-end. Similarly in 2012 and 2014, buying at May lows and holding on till year end, made investors richer by 25%. In 2009, the following the trend would have netted almost 50% gains.

In the five years between 2003 and 2007, buying in May and going away until the end of the calendar year turned out to be a highly profitable venture. Gains from the strategy were in double-digits, with the lowest returns being 37% in 2006 and 67% in 2003. The trend, however, did not work in the bear markets of 2015, 2011, 2008, 2001 and 1998.

Seasonality clearly favours buying in May. Investors could think of utilising expected volatility around Karnataka elections in May. “On the political front, the battlefield of elections in Karnataka state assembly will be keenly watched. Any new change in trend will affect investors sentiments in the coming month,” says Rahul Sharma, senior research analyst, Equity99.

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Poor corporate results can also bring volatility. Sanjeev Zarbade, vice-president PCG research, Kotak Securities said: “While better than expected results in IT and couple of banks have kept the market sentiment high, weak numbers from other sector stocks in coming days could lead to the downside for the market”.

Source: DNA Money