History may rhyme but may not repeat

Debunking the “Sell in May and Go Away” Myth

Many people believe in the market adage, “Sell in May and go away,” which suggests that the second half of the year is usually dull for the stock market. This saying implies that summer is a bad time for stocks, and it is better to avoid the market during this period. However, this belief does not always hold true, and relying on it can lead to missed opportunities.

Historical Trends Don’t Guarantee Future Results

While historical data might show some patterns, it doesn’t guarantee that the same will happen every year. For example, if you had sold your stocks in May this year, you would have missed out on significant gains. The S&P 500 ETF has increased by about 13% from May to mid-July. Similarly, in India, the Nifty index has also shown strong performance, rising from around 22,000 before the elections to approximately 24,600 now.

Anecdotal Evidence Is Not Reliable

The idea that certain times of the year are better or worse for the market is based on anecdotal evidence. These sayings are often based on a limited number of data points, which are not enough to draw reliable conclusions. Just like how exit polls can be misleading because they rely on a small sample size, these market myths can also lead you astray.

Another common belief is that the market cannot rise further if it reaches a certain valuation level, such as 20 or 24 times earnings. However, the last eight years have shown that there is no fixed correlation between valuation levels and market performance. The market can remain overvalued for extended periods, driven by factors like liquidity. For example, the US market is trading at around 25 times earnings despite having a growth rate of just 2-4%.

Market performance is often driven by liquidity rather than valuation. If there is enough money flowing into the market, it can continue to rise even if it appears overvalued. This disconnect between numbers and market performance means that we should not rely solely on historical patterns or valuation metrics to make investment decisions.

Focus on Current Trends

Instead of relying on old adages or historical data, it is better to follow current market trends. The past may not repeat itself, and the market can behave unpredictably. By focusing on current price trends and market movements, you can make more informed investment decisions. This approach helps you stay adaptable and avoid the pitfalls of relying on outdated beliefs.

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