Every year this time around the old Wall Street adage “Sell in May and go away” pops up, with the street fearing historically lacklustre returns during the May-October period.
But this year, experts say, may be different as the rally is supported by domestic players who are ready to buy any correction at a drop of the hat.
“The driving hands have now moved from foreigners to domestic funds. If the market sees a correction, it will be bought into and the downside for Nifty looks limited to 9200. Domestic markets will have volatility, but eventually, Nifty looks headed for 9500 levels followed by the global market strength. Undoubtedly, any Black Swan event may impact the overall markets,” said Yogesh Radke, head of quantitative research at Edelweiss Securities.
In four out the last ten years from 2007 to 2016, Sensex ended May with losses of as much as over 6%. Four years saw a slight increase, the maximum being 4.84% last May and the least being 0.12% in May 2013.
May 2009, which witnessed a jump of 20.52%, was an exceptional year as the UPA government came back to power for a second term. Similarly, Sensex gained 8.09% in May 2014 as the NDA government swept the Lok Sabha elections.
“The rally which began from end-December 2016 is driven by extreme liquidity from FPIs as well as domestic investors. With such liquidity, you can't stop the flow or the direction of the market,” said Arun Kejriwal, founder, Kejriwal Research & Investment Services.
The Indian markets have been seeing strong flows from domestic mutual funds. In the last three years, equity schemes have received on average monthly flows of Rs 6,000 crore, of which Rs 3,500 crore is via SIPs, a consistent route. On other hand, FPI flows have been very volatile. In March, FPIs were net buyers on the back of couple of block deals but in April they were net sellers.
Chandan Taparia, associate vice-president and derivatives analyst at Motilal Oswal Securities, concurs. “Historically, May turns to be negative. Post UP elections, the market was moving in a range of 250 points for four weeks. But recently the market has given a breakout. We are not getting any sign of a pause in the momentum. Already there has been some price and time consolidation. Till we get any clarification from the change in the trend, we cannot say that 'Sell in May and go away' is going to work,” he said.
Though they do not see any big sell-off, analysts expect some volatility.
“In May, you are going to have a volatile move because the market will try to create a new base, having made a new high. If we take the Sensex, 30000 is the new high. So, 29200-30500 would be the range in which I would expect the Sensex to broadly move. The reason is that the upside at this point in time is a little capped but the downside is a little open,” Kejriwal said.
Taparia also expects fluctuations.
“The market might see some volatility, a small decline from profit-booking, but the fall will be again bought. In April series, Nifty saw a high of 9273 then corrected to 9075. It took around 10 days to fall. It took 10-12 days for correction for 200 points. From that level, it recovered by 300 points in just three days. Every decline is being bought. There is less risk in the market.”
So, what should the investors watch out for and can we see markets reaching new highs? Experts say that a lot would depend on the ongoing earnings season.
“The results season had started on a subdued note with the IT results being below expectations but other than these, most of the corporate results have been better than expectations which will keep the momentum going. So this time it may not be sell in May and go away,” said Radke from Edelweiss.
“On the derivatives markets, we are surely having a heavy futures open interest outstanding to the tune of more than Rs 130,000 crore and high leverage positions can create a higher impact in the times of correction. We remain cautious on midcap F&O counters with high leverage,” he said.
Kejriwal said the peculiarity about May is that the result season is in full swing and normally the market discounts these results ahead of time. On the political side, there isn't much happening. The Fed would be having its policy meet in the first week of May. There aren't too many events happening in India other than the results.
Taparia, on the other hand, sees Nifty crossing 9500 in May series. “It is just around 150 points away from the current level. And if it stays above 9300, short-covering will take it to the higher level. Nifty may reach 9500-level in the May series.”
FPI FLOWS VOLATILE
- The Indian markets have been seeing strong flows from domestic mutual fund
- On other hand, FPI flows have been volatile. In March, they were net buyers
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May 2009, which witnessed a jump of 20.52%, was an exceptional year as the UPA government came back to power for a second term. Similarly, Sensex gained 8.09% in May 2014 as the NDA government swept the Lok Sabha elections.
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