Stocks
Another myth busted: The year-end stock market rally

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.

User

COMMENTS

Martin Gastinger

7 years ago

Dear Moneylife Digital Team, it is a common knowledge that with statistics you can prove everything and nothing. You can prove that the most dangerous place on earth is the bed as most people die in a bed. But let's find the flaws in your argument. The end of year rally has been explained to be a psychological effect, caused by portfolio managers, who keep some of their cash until the end of the year to buy those stocks that have done well during that year. Why? Because, they don't want to look bad. Imagine let's say microsoft shares have made massive gains during the year. Our portfolio managers don't want to be caught having hardly any of the real hot shares in their portfolio. Their investors would lynch them or at least take their money away from such a looser. So, what does this mean for your analysis of statistics. This psychological effect would mainly kick into action in years, where stocks have generally done well. Not in bust years, because in those years every portfolio manager can excuse their losses with the general bad economic environment and say all the others have lost too.
I think that your analysis should only look at those generally okay economic years and then check whether it's a myth or not. I would like to see the result of such an improved analysis. By the way. Myths (and fairy tales) do contain truths. You in India should be aware of that.

RNandakumar

7 years ago

FII investments forming a major part of investment investors like me would be grateful to you if you could come out with statistics on their withdrawal pattern of investments. December being their year end don't they make profit by selling in this period and reenter in January.

REPLY

k a prasanna

In Reply to RNandakumar 7 years ago

There is no fixed pattern for withdrawal by FIIs. They are here to make money. Once they achieve the target for the particular period / year, they withdraw. Normally, they will not be active in Dec. First choice IPO.

liju philip

7 years ago

Hope the markets correct. Will give an opportunity to buy some

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