Old adages often carry experience and moral lessons about anything and everything. And guess what? Trading is no exception. Historically, merchants, traders, and bankers have used many phrases to remind, warn, and impart valuable advice. Among these common trade, myths are "sell in May and go away." While the saying sounds lucid, it confuses many stock market traders about their positions in the stock market from May onwards. But why is it so? Stick with us till the end, and we will clarify every doubt of yours.
By literal interpretation, the proverb advises traders and investors to leave the stock market, wait patiently, and then return in November. "Sell in May and go away," a seasonal pattern of poor stock market performance that once existed, has long since vanished. The saying refers to the stock investment strategy based on a theory in which it is considered that the market under performs for a six month period, that is from May to October. whereas the market witnesses stronger growth in the period between November to April.
When it comes to the financial world, numbers are more than just numbers – they are proof of every hunch of an investor or a trader. They encompass the fundamental heartbeat of money and financial markets.
In the sphere of this saying, back in 1945, it was observed that the Standard & Poor's (S&P) 500 gave a return of a meagre 2% between May and October, against a whopping 6% from November to April. So far, these statistics have remained stagnant so far. So, Wall Street investors or traders have enough evidence to corroborate the saying.
Indian stock market, on the other hand, has a different tale to tell. On analyzing Nifty50's past "May" performance of 20 years, one can see that it has been positive for 11 of the total times. So, suppose one goes by this adage. In that case, they are heading towards improving their annual returns by liquidating their position at the start of May, avoiding opening any new position until November, and still being able to cut the mustard down.
While the past two decades seem a little bent in bulls' favour, the average "May" returns for all these years are bleak – barely a 1% gain. In May 2006, the average gain stood at 3.24%, escalated to 28% in 2009, and ended up crashing at a -3% in 2020. This proves that the adage is partially true when it comes to the Indian stock market.<>
Well, the answer to this question is dubious. We will stumble over its flaws, if we carefully analyze this trading theory. In the first place, stocks tend to record profits during an entire financial year, so it might happen that you're spending your summer outside the stock market, while the market is making investors gain or mint money like anything. Another flaw tells the same tale—the opportunity cost of leaving and re-entering the market is highly unreasonable.
The statistics culminate into one line – Indian investors tend to believe in the adage and sell in April which ultimately betters the performance of May. So, traditional data does not seem to shake hands with the changing dynamics of the Indian stock market.
Past performances can give us a lesson, but they are no seers. So, there isn't any solid future indicator that can tell you or predict the market's future course. In addition, we cannot ignore that, back then, monitoring a stock market demanded a lot from an investor or a trader. But with 24/7 share monitoring apps, you can easily identify when you need to change your position on a particular asset, and can quickly execute it via your trade account.
While there are other adages such as "time in the market beats timing the market", landing upon a logically conclusive reason to stick to "selling in May" is difficult.
The steepest declines frequently follow super-normal gains. Similarly, it has been observed that the "sell in May" period has produced positive results for the stock market. To see the big picture and survive the stock market's unpredictability, it's critical to have some backup trading strategies. Here are some trade strategies recommended by financial experts:
1. Diversify in May:
When the market dynamics are changing, it is recommended to diversify your stock portfolio. This diversification shouldn't come in terms of just the industry you are investing in, but also in the asset class. The addition of alternative assets such as infrastructure can turn out to be lucrative for your portfolio in such times.
2. Buy and hold strategy:
For long-term investors, this is the best trading strategy. Hang on to your equities year after year until and unless the market dynamics change.
3. "Rotate rather than retreat"- adopt a section rotation strategy:
As per financial research institutes such as the Centre for Financial Research and Analysis (CFRA), a trader or investor should rotate instead of adopting a retreat in May. For somebody who likes to adopt tactical strategies for their trade accounts every now and then concerning calendar trends, this will be the best way out there. Instead of pulling a grand exit, one can take into account the current trends and patterns to rotate amongst trade holdings.
4. Swing trade strategy:
This is designed basically for short-term traders or investors. The swing trading strategy emphasizes a fraction of an expected price move over a span of days or a handful of weeks, ignoring the long-term super normal gains. For long-term investors, this might not be the right strategy.
5. Leaving their allocation alone at the D-street:
Sheer foolery? Well, this is the favourite strategy of D-Street experts, since it helps novices as well as experts dodge the chant of "sell in May and go away". What most meticulous retailers do is that they simply leave their allocation alone. They simply let the basis point act upon their trade holdings. In technical terms, this is called portfolio churning. This trading strategy is based on the concept that you should leave the tactics and techniques to experts and should simply trust your strategy. This helps boost self-confidence, and deal with the emotional turmoil trading causes on your mental being.
To sum up, it's totally up to you whether to go with the adage or ditch it for better and more lucrative alternatives mentioned above, but consider all the factors before making a trade-related decision. We wish you a happy trading experience with FYERS! Don't forget to check out FYERS website for the latest updates.