Saturday, May 2, 2009

Sell in May, the final words...

It is rather bold and unacceptable for me to give the final words on any subject. Thus, these are not the final words, just my final thoughts.

I gave 'The Sell in May' example to show a seasonal tendency for prices to rally more in the Nov - March period. This was proved by processing data for the past 19 years on the Nifty. I do not know how such information can actually be used by traders. Much more work is required to incorporate these ideas into a strategy. Perhaps, position sizing is one area: increase volumes in the Nov - March period. Many readers made the same point. I fully agree with them.

The reason why we keep on doing these studies, research and scenario building is to keep our reflexes active.

The second issue is about the possible repetition of a 1993 pattern. Since there is no assurance that the pattern will repeat itself, we do only an academic exercise when we examine such possibilities. The same problem comes again: how do you incorporate such ideas into a strategy ? The answer is: not easily.

Some more scenarios:
A 1000 point rally in the nifty gives us almost 40% gains in seven weeks. We remain coupled with international markets, so more gains world wide could easily lead us into higher levels.
But, in India, we have an event that is likely to have some affect on market sentiment: the results of the general election.

Let us do the scenarios:

Scenario 1: The market continues to rally. Therefore, if the Congress wins enough seats to form a govt without the Left (unlikely, but possible), the markets will not respond at all since they have already moved up before the election. But, if there is a hung parliament, the risk is two fold: First, After such parabolic ralies, markets fall sharply as they correct. Second, the results of the election offer more risk. Therefore, we may see a sharp sudden market crash.

Scenario 2: The markets get jittery before the elections and see a sharp, sudden correction. A Congress win will see sudden, sharp rallies. A hung parliament may see just a couple of days of dips since the market is already oversold.

These are short term scenarios, the longer term will be affected mainly by the sentiment prevaling world wide.


Mind Without Fear said...

Dear Sudarshanji,

as usual, your writing displays a great sense of humility which is one main thing that attracts me to your writing - the fact that you always point out how your analysis is just that and should be used as one of the inputs and not the final word - I like that.

Now, personally for me, I am trying to answer a slightly different question and I seek your help in trying to figure out what could be the right approaches to address it.

You see I am using essentially a 2MA difference system. Back testing suggests it is profitable over the 6 month period. I am wiling to try it out for myself at this point.

And that brings me to the question. How can I set up a process to detect whether the 2MA system will still be relevant over the next year or two years? In other words, If I assume that the system that worked for the last six months might degrade over the next year, how can I detect such a degradation as early as possible?

I thank you in advance for your patient handling of all our queries.

gurvi said...

You did not mention what happen if BJP wins :

Market will surge? right?

lakhan said...

hello sir........
in this blog u didn't give any trading tips for any intra or del.