Sell in May, the final words….

It is rather bold and unacceptable for me to give the final words on any subject. Thus, these are not the final words, just my final thoughts.

I gave ‘The Sell in May’ example to show a seasonal tendency for prices to rally more in the Nov – March period. This was proved by processing data for the past 19 years on the Nifty. I do not know how such information can actually be used by traders. Much more work is required to incorporate these ideas into a strategy. Perhaps, position sizing is one area: increase volumes in the Nov – March period. Many readers made the same point. I fully agree with them.

The reason why we keep on doing these studies, research and scenario building is to keep our reflexes active.

The second issue is about the possible repetition of a 1993 pattern. Since there is no assurance that the pattern will repeat itself, we do only an academic exercise when we examine such possibilities. The same problem comes again: how do you incorporate such ideas into a strategy ? The answer is: not easily.

Some more scenarios:
A 1000 point rally in the nifty gives us almost 40% gains in seven weeks. We remain coupled with international markets, so more gains world wide could easily lead us into higher levels.
But, in India, we have an event that is likely to have some affect on market sentiment: the results of the general election.

Let us do the scenarios:

Scenario 1: The market continues to rally. Therefore, if the Congress wins enough seats to form a govt without the Left (unlikely, but possible), the markets will not respond at all since they have already moved up before the election. But, if there is a hung parliament, the risk is two fold: First, After such parabolic ralies, markets fall sharply as they correct. Second, the results of the election offer more risk. Therefore, we may see a sharp sudden market crash.

Scenario 2: The markets get jittery before the elections and see a sharp, sudden correction. A Congress win will see sudden, sharp rallies. A hung parliament may see just a couple of days of dips since the market is already oversold.

These are short term scenarios, the longer term will be affected mainly by the sentiment prevaling world wide.