In the later part of the eighteenth century, St. Leger Stakes, a popular horse race, was started as the last leg of the popular British Triple Crown. The race would be held at Doncaster Racecourse in South Yorkshire in September of every year. Soon it became a fashion amongst the British elite – aristocrats, investors, and bankers etc. – to liquidate their financial investments; escape from London heat, move to countryside to rejuvenate, and return only in autumn after the St. Leger Stakes race was over. This practice was described as “Sell in May, go away and don't come back till St. Leger's Day.”
Later, as the US stock markets gained more prominence over London markets, the adage was rephrased as “Sell in May and come back in October”, to coincide with Halloween.
Various research studies observed there is decent evidence to conclude that stock markets’ returns during November-April period usually outperform the returns during May-October period. Based on these observations of seasonality of stock market returns, many trading strategies were developed that involved tactically moving money away from stocks at the beginning of the month of May to other asset classes, especially agri commodities like wheat and corn which were cheap due to arrival of fresh crops; and return back to equities in October.
In 1990, “Beating the Dow” by Michael O’Higgins and John Downes popularized the investment strategy “sell in May and go away”. Bouman and Jacobsen (2002) popularized this strategy by naming it “Halloween effect”. Later a research paper by K. Stephen Haggard and H. Douglas Witte (2009) had shown investing in a “Halloween portfolio” provides risk-adjusted returns in excess of buy and hold equity returns even after consideration of transaction costs.
However, latest research has shown that the Halloween effect may be weakening. As per a recent Reuter study (see here) Over the last 50 years, the S&P 500 (.SPX) has gained an average of 4.8% between November and April, and just 1.2% between May and October, according to Reuters calculations. However, this pattern fades over a shorter time-frame.
Over the last 20 years, the out-performance of November-April over May-October narrows to 1%. Over 10 years, November-April has underperformed May-October by 1 percentage point and over the last five years, it's underperformed by 3 percentage points. It might be time to find words that rhyme with "November".
Indian markets have rallied strongly in the past 5-6weeks. The benchmark Nifty is higher ~9% from its March 2023 lows; while Nifty Smallcap100 is higher by ~12%. The rally in stock prices has corresponded to some strong macro data and better than expected 4QFY23 earnings. The bond yields have eased materially; RBI has indicated a pause in its tightening cycle; inflation has eased within RBI’s tolerance range; CAD has improved; GST collections are at all time high; lead economic indicators like freight haulage, auto sales, power demand etc. are improving.
The question is what should be the course of action for Indian investors and traders – especially in view of the dark clouds gathering over developed economies. Should they be selling into this rally and wait for better opportunity; or hold on to their positions and build upon these further.
My view is that technically markets may be inching closer to the upper bound of the trading range; hence the risk reward for traders appears negative at current price points. However, from macroeconomic and corporate fundamentals viewpoints, the markets seem to be embarking on a structural bull market that may last for over 5years. Therefore—
(i) Traders may lighten their positions and look for lower entry points to reenter. Though the opportunity may present itself much earlier than October.
(ii) Investors may hold on to their existing investments; and look forward to lower entry points for increasing their equity allocations.
In both cases, it is important that traders/investors stay alert and actively look for opportunities, regardless of how hot and dry this summer turns out to be.
