The Hindu Business Line : Of Santa Claus and other rallies

There are many seasonal trends that recur on a fairly regular basis in stock markets. Though the occurrence of these seasonal rallies or falls is not a certainty, they provide short-term investors a good opportunity to time their entry and exit. Long-term investors need not be unduly concern themselves with these trends.

The Santa Claus Rally

December is when children wait eagerly for Santa Claus with his sack of goodies. It would surprise many to know that the list of stops that Santa makes during his yearly journey on the reindeer-pulled sleigh includes stock markets.

Thus, the upturn that occurs in most stock markets towards end-December is called the Santa Claus rally. The reasons for this could be something as mundane as window-dressing by fund managers to prop up their performance. But the jingle of the profits towards the end of the year is attributed to Santa's goodwill by most market participants, who have Christmas on their minds. In India, however the year-end rally is muted and the market tends to meander sideways between Christmas and New Year.

Pre- and post-Budget trends

For the Indian stock market, of utmost importance is the Union Budget presentation that happens on the last day of February.

Companies expected to benefit from the provisions of the Budget see their stock prices moving up ahead of the `B-Day'. Short-term investors, too, can buy into such stocks. One does not need a crystal ball to predict the Finance Minister's moves these days. Reading up the discussions that the minister has with various industry groups would be an adequate guide.

We studied the movement of the Nifty for one month before the presentation of the Budget and one month after to see if these rallies really happen. From 1999 to 2006, the Nifty recorded monthly gains only twice after the Budget announcement.

On six occasions, the month ahead of the Budget saw stock prices rise. Going by these data, Finance Ministers always seem to slip in a clause that is unacceptable to the markets. So, the best strategy to play these Budget-oriented moves would be to buy a month before the Budget and exit a day after it.

Earnings Season

The first month of every quarter — April, July, October and January — signals the earnings reporting season. Some build-up in positions is always seen in the run-up to the earnings season, especially in companies that are expected to come out with strong numbers and, more important, strong guidance for the succeeding quarters.

Short-term investors can take advantage of this trend by buying into shares in the last month of the quarter such as December or March. If you are wondering how to pick up shares, the guidance given by the management of various companies in the previous quarter would be a good place to look. Keeping track of the news flows concerning your favourite companies and the industry they belong to would also be useful.

The Diwali Effect

It is commonly believed that the Indian stock market gets cracking during the Diwali festival. Though stock prices do not always move up before Diwali, our study shows us that in the last seven years, the market has always recorded positive monthly returns after Diwali. The lesson: Use dips ahead of Diwali to buy stocks. The post-Diwali rally can be used to book some quick profits.

The May and October Effects

We have been dwelling on happy seasonal trends so far. There are some nightmarish ones as well. May is when many fund managers prepare to take the summer break. So a sell-off or at best, a lacklustre market, is the norm this month. The crashes ofn May 2004 and, more recently, in 2006, have, of course, made everyone doubly wary of the month.

October is feared world-wide as the great stock market crashes of 1929 and 1987 occurred that month. It is also the month in which the falls of Black Monday, Black Tuesday and Black Thursday occurred. The October effect in the Indian stock markets is, however, overshadowed by the Diwali impact. So we can rest easy on that score.

Industry-specific Trends

Besides the the stock market, there are industry-specific seasonal trends too; these are clearly discerned and can be taken advantage of. Some industries release sales report at the end of every month. These reports cause turbulence in the stock prices. Notable among the industry reports released at the beginning of every month are automobile industry's monthly sales reports and cement industry's dispatch numbers. These numbers would give guidance on the growth trajectory of these industries.

Banking stocks are affected by the Reserve Bank of India's Credit Policy. Moves by the RBI to tweak interest rates or liquidity always affect the banking stocks. The RBI's Annual Credit Policy is announced in April. The Mid-Term Review of the Policy is announced in July, October and January. Watch out for these announcements if you have a stake in banking stocks.

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