JOIN USThe adage is premised on the belief that the market has strong growth potential between November and April, while investors sell in May as they start booking profits.
“The theory was developed as the second half of the year is generally more vibrant and investors usually buy during that period. This year investors are likely to be jittery and some weakness is likely on concerns (about) the election outcome,” Bonanza Portfolio Assistant Vice-President Avinash Gupta said.
Dip in confidence
Historical patterns suggest investor confidence dips in May as players book profits reaped in preceding months. Analysis of market movements in May over the past decade shows that the Sensex was negative on five occasions. Every gain alternated with a loss. In May 2008, the Sensex gave a negative return of 5.04 per cent. Significantly, the return was in double-digits only once, in May 1999, during the dot-com boom.
In the years when the market gained in May, the Sensex was up 3-19 per cent, while when it dropped in the same month the index was down 5-16 per cent, BSE data show.
“The market is already trading at higher levels as it had a run-up rally in the past months. There is headroom for the market to go down as investors might book profits now,” Unicon Financial Intermediaries Chief Executive Gajendra Nagpal said. “(The) ‘sell in May’ theory may hold true this time again as the election results would act as a double whammy with investors staying away from taking any fresh positions,” he added. However, some optimistic investors may not be ready to buy this theory as the market has been showering gold for them and the Sensex surged to a seven-month high in the first five trading sessions of May this year.
With the Sensex gaining 23 per cent so far this year, most market observers say profit-booking should be part of the smart investment strategy and that historical data also suggest sell-offs at current levels.
The Sensex had been on a record-breaking bull-run for three consecutive years — 2005, 2006 and 2007. In 2005 it surged over 42.3 per cent, in 2006 more than 31 per cent, and in 2007 47 per cent. It dropped 52.44 per cent in 2008. “Globally markets are volatile and ... events in the past few months have made them even more prone to head towards correction or consolidation,” SMC Global Vice-President Rajesh Jain said.