What does a fall in May mean for stocks in June?  

June 3, 2010

 The stock markets have taken a plunge in May. Based on past patterns, what should we expect for the month of June? Here is a study of the historical behaviour of the markets over the past 20 years

The stock markets have taken a beating during the month of May. The Sensex ended the month of May at 16,944, a 3% decline over its opening level. How does this performance augur for the month of June and even the rest of the year?

Moneylife took a look at the historical data, searching for some clues in the market patterns. We started from the year 1990. Over these years, the Sensex has ended positive in June on 12 occasions. This does not look statistically significant. But it gets interesting once you consider only the occasions when May was negative. The Sensex ended negative in May, eight times (excluding this year). Out of these eight occasions, the market has continued its downward momentum into the month of June only on three occasions, while witnessing a trend reversal five times. That translates into a high 62.5% probability of the June month ending in positive territory. Indeed, the stock markets have rebounded after hitting a low of 15,960 on 25th May.

A previous Moneylife study into the market trend for the June quarter showed an interesting trend. Since 2002, the Sensex has ended the June quarter in the opposite direction every year. Last year, it ended positive over the March quarter closing. Does this mean that the markets will end up lower than the March quarter closing?

We had pointed out then that unless the Sensex gets weighed down by the high valuations and sudden global shocks, it may proceed to turn in a solid performance in the coming year. Since then, the developments in Europe have raised concerns over a possible contagion, which has taken its toll on the markets. The doubts over Europe are expected to persist for the time being, which are likely to keep the markets on tenterhooks for the coming month. Over the last few weeks, foreign institutional investors have taken out large sums of money from the markets in a panic. Domestic investors have stepped in to cushion the impact to some extent.  — Moneylife Digital Team