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Stock Market: October bottoms…

Oct 17, 2002

It has been only downhill for global equity markets for more than two years and domestic bourses have also reflected a similar trend. The question on everyone's mind is when will we see some stability if not an upturn. Over the past two years, markets, hitting lows in October, have tended to strengthen running into the budget month of February. To determine if there is a trend, and respite for investors, we mined past eleven years data to arrive at posssible answers. Spirits tend to brighten in run upto the festive season. Therefore, one could expect the buoyant mood to reflect on domestic bourses -- which is a barometer of collective sentiment. However, in an earlier report, we indicated that markets do not seem exhibit the 'feel good factor' experienced at an individual level. In the earlier study, taking Diwali day as 'day 0', the preceding one and two month point-to-point return does not seem to show any trend of markets tending to offer superior returns in run upto the festive season. 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. Even in the current study, based on monthly average index value, the month on month return in October for BSE Sensex has been negative on 7 of the last 11 occasions. A point to note is that the sample size is not large enough to convincingly rule out randomness in results.

Stock markets: Does Oct-Feb offer above average returns*
Year Sept Oct % change
MoM
Nov % change
MoM
Dec % change
MoM
Jan % change MoM Feb % change
MoM
1991-92 1,830.4 1,791.8 -2.1% 1,894.5 5.7% 1,879.1 -0.8% 2,271.0 20.9% 2,432.7 7.1%
1992-93 3,243.6 3,093.2 -4.6% 2,626.7 -15.1% 2,574.0 -2.0% 2,521.9 -2.0% 2,703.4 7.2%
1993-94 2,710.7 2,692.8 -0.7% 2,875.9 6.8% 3,364.7 17.0% 3,818.8 13.5% 4,028.0 5.5%
1994-95 4,512.3 4,353.6 -3.5% 4,159.0 -4.5% 3,944.6 -5.2% 3,642.6 -7.7% 3,473.9 -4.6%
1995-96 3,396.4 3,521.1 3.7% 3,183.6 -9.6% 3,072.1 -3.5% 2,972.7 -3.2% 3,407.9 14.6%
1996-97 3,392.1 3,161.4 -6.8% 3,048.6 -3.6% 2,956.5 -3.0% 3,411.0 15.4% 3,452.2 1.2%
1997-98 3,944.8 3,974.8 0.8% 3,611.8 -9.1% 3,519.6 -2.6% 3,456.0 -1.8% 3,407.1 -1.4%
1998-99 3,089.9 2,878.7 -6.8% 2,907.6 1.0% 2,946.8 1.3% 3,273.9 11.1% 3,289.2 0.5%
1999-00 4,726.6 4,840.0 2.4% 4,588.5 -5.2% 4,802.0 4.7% 5,407.1 12.6% 5,649.7 4.5%
2000-01 4,406.6 3,804.4 -13.7% 3,928.1 3.3% 4,081.4 3.9% 4,152.4 1.7% 4,310.1 3.8%
2001-02 2,918.3 2,921.6 0.1% 3,164.3 8.3% 3,314.9 4.8% 3,353.3 1.2% 3,528.6 5.2%
* Average monthly index value

The festive season coincides with months of October and November. Numbers suggest that BSE Sensex tends to weaken in run upto the festive season. A theory for the poor market performance during this period 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 negative returns. However, it could also indicate that markets bottom out in October before starting the climb to the budget month of February. Number of years of positive returns from October increases to 7 in February from 5 in November, which could indicate a rising market.

Returns from October base
Year Nov Dec Jan Feb
1991-92 5.7% 4.9% 26.7% 35.8%
1992-93 -15.1% -16.8% -18.5% -12.6%
1993-94 6.8% 24.9% 41.8% 49.6%
1994-95 -4.5% -9.4% -16.3% -20.2%
1995-96 -9.6% -12.8% -15.6% -3.2%
1996-97 -3.6% -6.5% 7.9% 9.2%
1997-98 -9.1% -11.5% -13.1% -14.3%
1998-99 1.0% 2.4% 13.7% 14.3%
1999-00 -5.2% -0.8% 11.7% 16.7%
2000-01 3.3% 7.3% 9.1% 13.3%
2001-02 8.3% 13.5% 14.8% 20.8%

Having said that, month on month return for December is negative for 6 out of 11 years. Markets tend to attribute weakness in December, as FIIs close their accounting books and are not likely to be active participants. On the other hand, month-on-month return in January is negative in only 4 years of the sample set, which could be due to return of FIIs and fresh allocation to markets. This factor could be influencing returns in run upto the budget month. Also, markets tend to pick-up activity prior to the budget, leading to rise in number of years of positive returns.

The November '01 average value of Dow Jones was 9,722. Considering proximity of year end, U.S markets could experience a rally, as financial institutions attempt to minimise mark-to-market losses and try meet year end earning estimates for 2002. But such rallies are not for real. Though a rally could positively impact domestic sentiment in the near term. Having said that, downside risk below 3,000 levels is minimal and considering markets hit lows in October, fundamentals takeover, which could be driving the trend.


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