The Hindu Business Line : Of stock markets and superstitions

If ‘Muhurat’ trading is believed to set the tone for the entire year, investors may have read signs of the impending crash on Diwali in 2007, as the Sensex closed in red for the first time in seven years.

Kumar Shankar Roy

Ever felt jittery about investing on a Friday, the thirteenth?

Do you believe the stock market will fall on the day of a lunar eclipse?

If you are a first-time investor, you may have been coaxed by your broker to buy a ‘certain’ stock for the first trade.

The list of such superstitious beliefs can be long. No Indian investor can claim to not have been influenced, at one time or the other, by such sentiments. The tendency to be influenced by these is pronounced during choppy phases in the market. Let us look at a few ‘superstitions’ and how investors fared under their ‘spell’.

Not ‘Holi’ enough

While stock market investments are all about financial analysis and the future outlook for a company or business, who wouldn’t like to have a little bit of extra help with choosing or timing his investment? An investor who is undecided will surely want that ‘extra’ signal.

Investors from a particular trading community in Gujarat are uncomfortable about trading after the festival of Holi. It is believed that the first one who does may go bankrupt. This wariness has been passed on over no less than four generations.

Now applying statistics to this context, we see that the Sensex has put up a muted show post-Holi. Sensex gains in the week after Holi in the last three years were less than 1 per cent, with March itself being a lacklustre month for stocks. In 2005 and 2007, monthly Sensex gains in March (the month in which Holi is celebrated) stood at around 0.03 per cent, though the markets rose by 0.7 per cent in the week following Holi, indicating that the superstition did not pay off. Whereas, in 2006 this belief may have paid off, with gains in the week following Holi at 0.6 per cent and the gain for the whole of March at 8 per cent.

Lunar eclipses

If you believe that lunar or solar cycles have an effect on the mood of the market, you might want to read the following carefully. When a trend watcher named Steve Puetz attempted to see if eclipses and market crashes were somehow related, he studied eight of the greatest crashes in the financial markets and found a pattern in them which could be linked to the timing of the lunar eclipse.

Globally, stock traders have long had a saying, ‘Sell the full moon, and buy the new.’ However, Indian investors appear to have quite a different cycle to their moods! Of the 11 trading sessions in the Indian markets from 2001 that occurred during a lunar eclipse, the Sensex has actually risen in eight ! So here we have a deviation, although not the sort of ‘de-coupling’ market experts like to look for.

Black Monday

Monday has always been a nervous day for stock market investors. The Sensex, the barometer of the domestic equity markets, has displayed a distaste that is in line with global financial markets, for the first day of the week. Monday, October 19, 1987, was the most commonly cited Black Monday, when the Dow Jones Industrial Average dropped 23 per cent. As the weekday that has witnessed the largest one-day percentage decline in stock market history Mondays have lived up to their reputation even in the Indian context.

Out of the 20 biggest Sensex declines so far, seven have occurred on Mondays. Remember the 1,400-point crash recently on January 21? Knowing this, investors cannot be blamed for approaching Mondays with a bit of trepidation, not only because it means a long time commuting to work but also because it may well be a black day for their investments.

The Bull and the Rat

The 3,000-year-old Chinese astrology has 12 animals that combine with five elements to define the nature of each year. And 2008 is the year of the Rat, a “water” creature combined with the “earth” cycle, making for an unstable combination. The experiences with previous ‘Rat’ years have not been great for the stock markets.

The Morgan Stanley Capital International Asia Index fell 19 per cent in the most recent year of the rodent i.e. between February 19, 1996, and February 6, 1997. The current Year of the Rat has already begun, on February 7.

They may not believe in rats as bad omens, but traders on Dalal Street did create a furore in recent times over the bronze statue of a Bull erected on January 11 by the Bombay Stock Exchange, blaming it for the crash of January 21.

Ironically, it was the positioning of the “bull” that brokers and angry investors, who had lost loads of money, took objection to.

The furore over the bull prompted the Bombay Stock Exchange to come out with an ‘official’ statement against the protestors, urging the media not to indulge in such “cock and bull” stories!

Sign of crash somewhere else

If “Muhurat” trading (the first trading session of the business year that happens on Diwali eve) is believed to set the tone for the entire year, investors should have read signs of the impending crash on Muhurat trading this year.

When trading began for Samvat 2064, expectations were high, as Samvat 2063 had left investors with a high Sensex return of 51 per cent. But Muhurat trading proved to be quite disappointing and the Sensex closed 151 points lower this year. This was the first negative close for the Sensex in a Muhurat trading session in the past seven years. The last time it happened was in 2000 and Sensex gave a negative 18 per cent ‘return’ for 2001.

Tip for the investor: Past performance of superstitions may or may not be sustained in future and should not be used as a basis for investments.

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