History's on your side

SMARTSHARE

After bottoming out in June , the Sensex has been on a one-way ticket to the moon. From the depths of the 8,799 level seen on June 14, it has risen 4,501 points to the 13,300 level without a major dip.

Fearing a correction, and a heavy one at that, investors have played reluctant bride. As a result, their participation in the market has at best been hesitant. And those who have indulged have done so with a foot in the door.

Acrophobic behaviour at times is justified and rational, but if it happens on a regular basis investors miss out on major action and as a result the portfolio underperforms the broader market.

I am not forecasting whether we will have a deep correction or not. What I am doing is bringing to your notice that November to January has historically been a period of positive returns for the markets, and investors should keep this at the back of their mind.

In the past seven years, the Sensex has given positive returns during this period. The returns have averaged 16 per cent for the seven years under study, with a range of 10.2-25.69 per cent.

The BSE 500 too has given similar results, rising 19.08 per cent on average, with a range of 8.47-33.68 per cent. The BSE 500 has beaten the returns in the Sensex in four of the last seven years and when it has outperformed, it has done with panache, like it did in 1999, returning almost double the rise in the Sensex.

A natural corollary to our theory is that mid-caps tend to outsmart the large caps one during this period. The BSE Mid-Cap or CNX Mid-Cap indices would have been more appropriate and representative indices, but they do not have adequate history to draw significant conclusions.

Coming to November in particular, it has the rare distinction of rising in each of the last six years. In fact, the average rise in November has been 7.9 per cent. While that does not mean we will certainly have a similar return this month, the past track record does enthuse you.

October's behaviour further buttresses our point. This is usually a weak month. If you were to look at October since 1990, you would find that the Sensex has lost in 12 out of 16 Octobers till 2005.

However, there is a positive take from this as well. Out of the four instances when Sensex closed October with gains, it went on to rise in November as well in those years. With a 4 per cent rise in October this year under its belt, there is fair chance that the Sensex could do an encore in November.

Why do the markets generally do well in October-January period? One of the possible reasons of the unusual bounce in the step of the markets during this season is that FIIs are relatively more active during this period.

A cursory look at the FII inflows of the past six years reveals that barring 2002, when only 8.97 per cent of the FII inflows came during this period, the inflows in all other years have ranged from 30.31-75.86 per cent . That should explain the buoyancy of this period.

With Indian economy expected to continue with its 8 per cent+ growth amidst a forecast of global slowdown, I don't think FIIs can afford not to fly to Indian shores like the Siberian cranes that do each winter.