What's the best season to invest in the stock market?
Anil Rego
Published on Mon, Jan 16, 2012 at 15:42 |
Source : Moneycontrol.com
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There has been a constant argument on whether there is seasonal or monthly patterns that one detect as far as returns on stocks are concerned. The argument almost compels one to consider if there is indeed an ideal month to invest in the markets.
A look at history
The past 3 years' have been extremely different in every possible ways; equity markets are no different. There is no identifiable pattern; clearly, seasonality is not a factor that should determine your entry / exit. Roughly, though, it looks like the street considers March a good month to get in to ensure that one could take home some decent dividend and August is generally a lack luster month for most investors, there are fewer participants due to exhaustion and considering that they are in a month which lacks little action.
Going back in time, 2001-2008 was again a period with too many developments. Unpredictability continues to be the middle name of the markets and it is evident from the chart below. During this very period, Sensex remained unidirectional. From a meager 3000 points it scaled all the way up to 21000 points. But then this had no correlation to the monthly returns that the markets delivered because there were periods which remained highly volatile. The street's apparent belief that March / August were good months for taking appropriate positions in the market is defeated when one looks at the below pattern.
The Santa Claus rally - Really?!
A Santa Claus rally is a rise in stock prices in the month of December, generally seen over the final week of trading prior to the New Year. The Santa Claus rally is also known as the "December Effect." This a more popular phenomenon in the US, however, there have been brief instances of decent rallies in the Indian Markets as well. The domestic sentiment from this perspective is however, slightly different - the FIIs predominantly take a back seat during this month, due to festivities lined up, and this in turn indicates that there will be flight of capital therefore markets are likely to remain flattish or have a bearish undertone.
January Effect - New Year, New beginnings
The tendency of the stock market to rise between December 31 and the end of the first week in January is termed as the 'January effect'. The month of January, it has been seen, has strong significance in predicting the trend of the stock market for the rest of the calendar year.
The occurrence of this is attributed to the fact that there is considerable selling of stock holdings during this period, to claim capital losses that would benefit investors from a tax perspective. As the calendar year rolls over, investors plough this amount back into the market which in turn pushes the prices up, thereby creating a make believe roller coaster ride. Infact, the very same stocks that have been sold off to realize the losses, will then trade at a discount. Bargain hunters step into such laggards to ride the short term wave. This phenomenon occurs between the last trading day in December of the previous year and the fifth trading day of the New Year in January. This again is a proven thesis with the US markets but domestically it fails does not always hold true.
Clearly, seasonality may not be the way to invest in equities. There are of course sectors like Textiles, Sugar etc., that follow an identifiable pattern backed by clear logic. Despite such nuances, one may still be better off sticking to investing in equities via thorough research and fundamental evaluation. And even better, invest regularly and systematically!
Anil Rego is the CEO and founder of Right Horizons
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