"Sell in May and go away"

There's an old saying in the  stock market: "Sell in May and go away". A  famous study   published in the American Economic Review in 2002 found that this  phenomenon does exist and  that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher in the November to April period than they were in the May to October period. Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Will this strategy work this year also, more particularly with respect to Indian stock market? Let us analyse.

 

Let me state at the very outset that the worst is over for the Indian economy. The stock market has discounted this fact, but two critical events: the outcome of Elections 2014 and the progress of monsoon will play an important part in the much awaited economic recovery in India. Let us analyse the prospects in detail.

 

Election outcome: The on-going election campaign has been a bitterly contested affair so far with the 'war of words' reducing it to 'gutter level politics' on several occasions. International agencies like Morgan Stanley, Merril Lynch & others, known for their market analysis skills have jumped in the fray to prepare research reports on 'Poll outcome'. On the basis of these reports one can build 4 different post-poll scenarios:

1. NDA getting a clear majority with 272+ seats, leading to a strong 'Modi Sarkar'

2. BJP getting over 200 and NDA 240+ seats, with Modi leading a loosely held coalition

3. BJP failing to reach the magic figure of 200, and NDA falling short of 240 odd seats, leading to a sacrifice of Modi, and installation of a BJP led Govt. headed by somebody other than Modi

4. Congress on its own getting 125+ seats, and UPA crossing 150 seats, leading to a UPA led rainbow coalition of so called secular parties.

 

While the first and fourth options look most unlikely, we may be looking at option 2 & 3. I would like to throw my weight around option 3, based on Astro-analysis. The chances of scenario 3 unfolding after May 16 is based on following indicators:

• The planetary configuration in India indicates a fractured mandate in Election 2014
• While BJP will emerge as the single largest party, it will end up way behind the magical number of 272.
• The importance of UP in Indian politics is waning, and the next PM could be from Central India (may be Madhya Pradesh)
• Regional satraps from states on South-eastern coastal belt will play an important role in Govt. formation (Jayalalitha from TN, Jaganmohan Reddy from Seemandhra, Navin Patnaik from Orrisa & Mamta Banerjee from WB: one or more of these leaders will play a crucial role in Govt. formation).

Progress of Monsoon: There will be a lot of concern about the occurrence of El Nino, leading to a delay in advancement of monsoon in May-June 2014. There could be a possibility of drought in few states raising alarm bells over decline in kharif output. These fears will propel the continuation of higher inflation levels.

From the above analysis I am tempted to conclude that Indian stock market is likely to enter a temporary bear phase which is likely to last at least 36 days from 17th May 2014, lasting up to 21st June 2014. There is likely to be a delay in Govt. formation and the new Govt. may settle down only after June 21. At the same time the major adverse impact of El Nino will play out in May-June and is likely to subside by end of June. So investors are advised to "Sell in May and go away". But I still continue to maintain that FY 2014-15 promises to be an excellent year for equity investment and the equity markets are likely to resume their secular uptrend from August 2014. Position yourself to take advantage of the opportunity.

Disclaimer: I do not claim to be an Astrologer, the above analysis is based on my limited understanding of the subject, with a view to help investors take informed decisions on their investments.