Sell in May syndrome could spook mkt sentiment

When the opening bell rings on Dalal Street tomorrow after two days of break, the age-old maxim "Sell in May and go away, but come back in November" could haunt the stock market once again.

If one believes this theory, which is based on calendar patterns of the market movements and has held true over the years across the world, investors could well be busy booking profits on their portfolios this month as well as the next five months until the good times return in November.

An analysis of key indices across various global markets, including India, shows that gains in the "best" six-month period from November to April have been typically stronger than the "worst" six-month period from May through October.

While there could be plenty of different reasons for this pattern across different markets and in different years, it certainly adds weight to the theory.

Last year, May witnessed the biggest intra-day loss of 1,111 points and the biggest single-day loss of 826 points for Bombay Stock Exchange's benchmark Sensex. The market fell 13.6% in May 2006 after a gain of over 31% in the first four months of the year.

In the six month period between May and October last year, the Sensex gave a total return of 7.6% while gains in the preceding six months from November 2005 through April 2006 was nearly seven times higher at 52.6%.

This time around, the analysts warn, the fall could be much larger if the May sell-off theory holds true again as the Sensex has gained just 7% in the six-month period between November 2006 and April 2007.

The BSE's 30-share barometer index has given negative returns 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.

Analysts say the theory is not mere superstition and is backed by some sound fundamental and technical reasons.

The markets tend to surge between November and April as they are supported by a generally robust shopping season in November-December, year-end bonus announcements and tax gains as well as pension fund contributions into the stocks.

The companies also tend to make the most of the positive announcements along with or just before their annual results, which lead to a jump in share prices between the November-April period, the analysts say.

Interestingly, the trend is seen holding true across most of the global markets in the past. In the US, the 30-share benchmark Dow Jones Industrial Average (DJIA) has registered an average gain of less than 0.5% in the May-October period since 1950 against an average growth of 7.9% for the November-April period. This time around, the Dow has gained 8.6% in the November-April period, which is close to its historic average. This suggests the theory has held true during the "best" period, and the "worst" six months could also do an encore of the historic trend.

According to Jeffrey Hirsch, president of Hirsch Organisation and editor of Stock Trader's Almanac, Dow's record high over the 13,000- mark scaled recently makes the market a ripe case for correction.

Incidentally, the May theory was first propagated by Stock Trader's Almanac founded by Yale Hirsch, father of Jeffrey Hirsch.