January Effect, Sell in May! Are these market sayings true for India?

The January Effect theory fits the US stock markets, where investors sell-off during the year end and turn into buyers in January with the start of the new financial year.

Jan 07, 2016 06:01 IST India Infoline News Service

Stock market too has its share of folk tales or common sayings, which are sometimes followed by investors. Here is an overview of some of such market beliefs along with hard core facts to show if an investor should pay attention to such ideas.
 
Sell in May and go away - This saying came into existence as brokers in London used to sell off their shares before going on a long holiday in May. However, a study of historical average monthly returns in May over the last 21 years showed that such a belief has little validity in India.
 
January Effect - Such a theory fits the US stock markets, where investors sell-off during the year end and turn into buyers in January with the start of the new financial year. Since, India’s financial year begins in April and closes in March, therefore, such a rush is not seen in India.
 
Mark Twain Effect - As Mark Twain quoted it, “October. This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February”. The theory appears to be true when it comes to Indian markets as the October average monthly returns stood negative in all of the past ten years.
 
Pre-budget Rally - It is believed that the markets mark a pre-budget rally up ahead of the Union budget and crash following the release of the budget due to a gap in expectations and outcomes. The same is visibly true as the Indian markets have witnessed pre-budget rally and post-budget crash each year over the last 20 years.
 
Elephants Can’t Gallop - It is a common belief that companies tend to grow exponentially during the early years of their incorporation, but the rate of growth decelerates once a corporate attains a certain size or revenues. The saying is true in context with the Indian markets as small-cap stocks outperform mid-cap or large-cap stocks. However, small-cap stocks rally only during bullish phase while large-cap stocks outperform during bearish or steady market conditions. 

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