Will Momentum last?
Our bellowed Sensex had one of the best months in last Ten years. After May of 1999, first time we saw sensex rising for than 17% in a month. Last month is this report we advised our readers to buy stocks as we foresaw good times. How do we judge the weather now? Well, slightly overcast to say in brief. There are many events scheduled over a month which can derail our rally and the advice is to remain indoors or carry an umbrella (strict stop loss) when you dare to venture out !
In the US, there is a market maxim, ‘Sell in May and go away’. The idea is to sell in the month of May and enter after Halloween in November. The saying is based on some studies that show that returns during the November-April period are better than the May-October period.
We scanned the data in India from October 1989 onwards to find whether the rule applies to us as well. We found that while the April- October returns in the last 19 years were 9.38% on an average. The returns were positive in 12 (63%) out of the last 19 years. The returns in the October to April returns were 12.57% in the last 20 years. The returns were positive in 15 (75%) of the last 20 years under study.
The month of May is notoriously bad for equities. In the last 19 years, it has given a negative return of 0.97%. This is the second worst month after October, which has an average loss of 2.81%. In the last 19 years, the month of May has returned losses in 9 out of 19 instances. Besides, the month of May has some other idiosyncrasies as well.
Stock markets have see lot of turmoil in last fifteen months and this month it was not in mood to heed any sign of caution. One such sign in Swine flu. A spokesman for the World Health Organisation has said that the swine flu virus was spreading quickly in Mexico and the southern US and has the potential to become a pandemic and a global threat. We will keep monitoring the situation for any adverse impact on our markets for the whole of May month.
The second event to watch out is US government’s announcement of banking stress test results. We expect regulators to tell us what market already know that US banking system is in dire straits. US treasuries yields are rising again and we feel that the Bull market started in Government treasuries which started in 1980s is in its fag end. The yield are going to rise further that markets expect and that going to make borrowing for the US government much more tougher. Packages which are announced by various agencies of the government at a drop of a hat will prove extremely difficult to fulfill once the borrowing becomes scare.
In India, remaining phases of general elections and subsequent results are also going to be keenly followed proceedings. We expect more seats for both leading parties of the country and if any of the two major parties led government comes to power that should not be a problem for the markets. What markets will not like is uncertainty and a Prime Minister from any smaller party would be a recipe for a disaster.
India’s merchandise exports in March declined for the sixth successive month on weak external demand from developed economies. Trade slowdown is a global challenge and IMF expects the volume of world trade to dip in 2009 for the first time since 1982.
Most of the quarterly results announced so far are to the markets liking , save for DLF ltd. The sector is likely to receive brunt of selling next week by the disappointed bulls and reality of the real estate is much bleaker than what bulls hoped for. Amongst the notable results schedule in the month we will kenly follow numbers from biggies like HDFC, SBI, NTPC, ONGC, TATA STEEL, L&T, PNB, GRASIM and M &M.
Outcome of general election and capital flows will decide the fate of the markets in the month of the May. We advise investors to consolidate their recent gains and keep their risk appetite intact for the month of June when the weather will be much more clearer.
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