Do retail investors need to sell equities in May?

Many people in the markets advocate "sell" in May as the month of May is known for some significant corrections especially in the developed world. We often see some investors chasing the two-whleers stocks on the eve of Diwali festival as normally we see some surge in the festival sales. Some investors accumulate the stocks of companies producing the air conditioners at the start of summer. Is it so easy to make money by timing the cyclical patterns? Are these cyclical patterns consistent?

If we look at the domestic stock market for the last 16 years, about half of the period, during the month of May, the markets actually moved up in a positive territory. However, in five out of those eight years of Sensex fall in May, the index ultimately ended the respective calendar years in green, that too mostly in double digits.

For over decades, we used to face severe rainfall failure once in three years, but that record was broken a few years ago. We got severe monsoon failures for the last two consecutive years which too was rare, if we go by the history. The sugar industry used to post quite regularly a 3-year cycle pattern in its output and domestic prices. However, the sugar industry went down for a longer period of beyond six years after its rally in 2006/07.

An industrial house well known for corporate ethics couldn't post consistent growth in revenues and profits in one of its companies. This company operating in three segments of chemicals saw a significant dip in business and profits roughly every three years. As it wanted to come back to linear growth in performance and satisfy the shareholders, it identified two core businesses (based on data of several decades) which could be contra-cyclical to the existing businesses. That is, the fortunes of these new businesses (i.e. trends in revenue and profit) were moving in the opposite directions (contra-cyclical) to the existing chemical businesses of the company. The company entered these new businesses hoping for the sum of two contra-cyclical businesses leading to a linear growth in overall businesses. However, what didn't happen in over four decades, happened – the new businesses also started following the same cyclical pattern of old businesses.

Thus, the stock markets, macro events (like rainfall), industry's prospects, business fortunes of individual companies, etc, have cyclical patterns, but these cyclical patterns themselves are cyclical. Hence, it would be prudent for the retail investors to evaluate the structure of economy and industries, and the prospects of the individual companies rather than blindly following the cyclical pattern for their investments.