Monthly Trends in the Market

We, as investors, are always in search of the right time to invest. But the nature of the stock market makes it unpredictable and highly volatile. Just like mangoes can only grow in certain seasons the stock markets have their seasons too. Taking the support of the seasonal bets will give you an edge in making portfolio decisions and enhance your returns.

Searching for that edge, we decided to analyze the average monthly returns to gauge the seasonality in the stock market. We based our study on the constituents of the NSE 500 index for the past 11 years, spanning the period from 2008 to Feb 2019 (taking into consideration survivorship bias).

The table below shows the average returns during the year:

While looking at this data, what you might notice is:

The markets, on average, tend to have strong returns from February to April. January has traditionally been a bearish month with 9 out of 12 years being negative while the stock market has given positive returns in April in 9 out of 11 years.

New money tends to flow in the stock market at the beginning of the financial year (April having the highest average monthly returns). January, April, July, and October tend to be volatile due to the result announcements that happen in the first month after the quarter closes.

Looking further into the data, 7 out of 12 months on an average, have been positive but not all of them have a clear trend. We haven’t seen a strong rally in March, May, and September for the past 11 years, while July and December have shown positive returns for 8 out of 11 years.

It is interesting to notice how staying invested in May has given exceptional returns during the election years. Supporting our previous article Election and the Markets; wherein we interpret Nifty50 returns by investing prior to elections.

 “In the business world, the rear-view mirror is always clearer than the windshield.” – Warren Buffet

While we cannot predict the stock market, we can always look back at the data and take advantage of it as investing more when you’re positive on an eventual upswing can further help you maximize on the gains.

While it is extremely important to pay attention to seasonal patterns and market cycles, it is not the only factor. It is critical to work through the strategy that purely depends on the month as a differentiating criterion.

If you decide to buy and sell based on trends, this can certainly be used as a base to build your strategy on. While this data is an average for the past 11 years, it doesn’t suggest that it will hold true all the time in the future. You increase your probability for maximum returns using fundamental and technical analysis in conjunction with seasonal and cyclical patterns.