Waiting for Diwali break - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Waiting for Diwali break

Sep 28, 2002

It was another dull week on the bourses, as investors preferred to wait on the sidelines till any compelling trigger for action emerges. Sentiment at start of the week was impacted by the Akshardham temple attack and fears of a possible communal backlash. Also, U.S markets continue to spiral down, capping any revival in global equity sentiment. With a month left to Diwali, the general perception among investors is that markets tend to perform better in run upto the festival. We thought to highlight a study conducted last November to determine whether there is a 'Diwali effect'.

Taking Diwali day as 'day 0', the preceding one and two month point-to-point return does not seem to show a trend of markets tending to offer superior returns during the concerned period. In fact, more often than not, one would have lost money on the long strategy. In the last 11 years, markets declined on 7 and 8 occasions over the respective window periods. Considering the probability of decline selling index futures, buying index put options or writing an index call option could yield better returns.

Event (Diwali) Day '0' Preceding 1 mth Preceding 2 mth Subsequent 1 mth
1991 1,918.0 8.2% 5.9% -2.1%
1992 2,987.2 -8.3% -0.3% -14.4%
1993 2,786.4 2.8% -0.5% 24.0%
1994 4,303.7 -0.8% -4.6% -5.1%
1995 3,486.2 1.2% 4.7% -15.5%
1996 3,080.3 -1.5% -9.2% -9.1%
1997 3,803.2 -2.5% -3.6% -6.1%
1998 2,853.3 -7.7% -4.6% 3.9%
1999 4,650.5 -6.3% -2.7% 4.6%
2000 3,757.2 -8.1% -14.5% 5.6%
2001 3,113.0 5.8% 16.1% 8.9%
*All returns are point to point

That said, the feel good factor in run upto Diwali does not seem to be rubbing off onto the market. Therefore, the 'buy before Diwali' strategy does not hold good. On the other hand, a theory for the poor market performance during the window periods could be that investors -- and people in general -- prefer to stay liquid. Being an auspicious time of the year, one tends to undertake big-ticket purchases -- consumer durables, automobiles -- during this period. Consequently, funds are likely to be withdrawn from the stock market and invested in 'real assets' leading to the negative returns.

While selling may have already been exhausted prior to the run upto Diwali, there is not much compelling reason for buoyancy in sentiment. Over the past months, markets have repititively been hit by bad news. First was the deferring of oil sector privatisation followed by deferring of raising foreign direct investment (FDI) limit in the aviation, telecom and insurance sector. S&P, the international credit rating agency, downgraded India's domestic currency soverign debt to junk status. As per reports, India has dropped out of the ten most attractive destinations for FDI. Compounding the pessimism, GDP growth rate of the country has been revised downwards for FY03 by few agencies. International Monetary Fund has revised GDP growth to 5% from 5.5%. Domestic economy monitoring agency, National Council of Applied Economic Research (NCAER), revised growth rates down to 4.8% from 5.5% earlier. Adding to the concerns, the elections in Jammu & Kashmir could vitiate geo-politcal environment in the region. Gujarat continues to smother, and run up to elections in January '03 could witness similar events of this week to foment communal sentiments.

Having said that, market valuations -- BSE Sensex -- remain attractive at lows of 12.3x trailing 12 month earnings. As per reports, a fair multiple for the S&P 500 (U.S) is believed to be 15x earnings. Considering the growth potential of India, market aggregates could attract higher valuations of 20x earnings. The lower valuations, however, could be a market signaling that while potential exists, triggers to unlock the potential are consistently missing. One waits in hope...


Equitymaster requests your view! Post a comment on "Waiting for Diwali break". Click here!

  

More Views on News

What to Do if there is a Second Wave of the Stock Market Crash (Profit Hunter)

Sep 24, 2020

Here's what I think investors should do in this selloff.

IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea? (Outside View)

Sep 23, 2020

IDFC Mutual Fund is taking the road less travelled and hence started a campaign SIFI (SIP in Fixed Income) to promote the concept of SIP for its debt funds investors.

My View on the IPO Market (Fast Profits Daily)

Sep 23, 2020

In this video, I'll share with you my thoughts on the recent spate of IPOs and what it means for the market.

I Believe These Stocks Will Deliver the Most Outsized Returns in 2021 and Beyond (Profit Hunter)

Sep 23, 2020

Rules of the racetrack can help you bag the biggest gainers of the coming decade.

An Important Hurricane Update for Energy Traders (Fast Profits Daily)

Sep 22, 2020

In this video, I'll show you how the extended hurricane season in the US will affect traders in crude oil and natural gas.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 24, 2020 01:27 PM

MARKET STATS