As we head towards the end of the calendar year, whispers of a year-end rally in the stock markets are doing the rounds. But this is yet another myth
Among the many myths that are bandied around the investing world is the phenomenon of the 'year-end stock market rally'. The calendar year is coming to an end and that has brought with it the usual murmurs of an impending rally in the markets. If these are to be believed, the months of November and December are supposed to be extremely fruitful for equity investors, where they stand to make solid gains. If only it were that simple.
As with most other such notions, data doesn't support this. Unfortunately, very few people go back to test a notion with past data.
The truth is that you have as much of a chance of losing your money as making a fat buck during this period. As Mark Twain once said, "October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."
Moneylife ran a study covering the performance of the Sensex over the two months of November and December, starting as far back as 1979. During this period of 31 years, we found that the Sensex has delivered gains on 18 such instances, while the index tanked on 13 occasions over the two months. This means that an investor has only a marginally better chance of achieving success based on this belief than going by the toss of a coin. A 58% probability of success is hardly a convincing argument in favour of the year-end rally.
Over all these years, the performance of the index during these months has been very volatile. The Sensex soared by 28% over November and December in the year 1993, when foreign investors had just started to nibble into Indian stocks.
Three years before that, in 1990, the index plunged 21% in this two-month period. On an average, the index has recorded gains of 4% on such occasions over all these years. That doesn't mean that the market will not go up over the next two months. But it will be for reasons other than the fact that these are great months for the market, historically.
Investors would be wise to be more sceptical about such beliefs and form their own opinion based on empirical evidence.
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