B G Shirsat: Rallying to fall?

The 10-year track record of the market: a pre-budget rally means a post-budget fall in indices.

With just 10 days left for the presentation of Budget 2006, the market witnessed a correction last Friday with the Sensex dropping 143 points.

This, however, was a minor correction after the sustained rally, which took the Sensex from 7685.64 on October 28, 2005 to 10124.30 on February 16, 2006. During the one-and-half months prior to the budget, the Sensex has gained over 700 points before the February 17 correction.

Now a brief look at the past:

When the index has moved up in the two months prior to the budget, it has declined between 10-25% in the next six months.

On the contrary, if the pre-budget rally fails to take off, the index shoots up over 25% in six months following the budget.

After the presentation of the budget for 2005-2006 on February 28, 2005, the market reacted on March 1 with the Sensex dropping 62.78 points to 6651.08.

The correction was short-lived - just for a day. The Sensex, thereafter, rose to a new high of 6915.09 on March 8 - a rally of 264 points in four trading days. Immediately after the 264-point rally, the market went into correction mode, which lasted two months. The Sensex declined by almost 800 points to 6154.44 on April 29, 2005.

The market shot up over 25% within six months after the budgets of 2003 and 2004, which were not preceded by any rallies.

The budgets of 2000, 2001 and 2002 were preceded by a rally taking up the Sensex by around 10%. However, the market declined sharply by 10-25% in six months following the budget.

Political instability played a major role in the market ahead of and after the budgets of 1997,1998 and 1999. The dream budget of 1997 saw the stock market surge even after the pre-budget rally. In 1998, it continued with its downturn after the budget.

The 1999 budget, the first full budget by the National Democratic Alliance, saw the Sensex continue with the momentum of the pre-budget rally after the presentation of a reform-oriented budget.

This simple relationship is leading market entities to keep their fingers crossed on the behaviour of the market ahead of this year's budget.

Cut to present:

The Sensex has already touched record levels of 10,000, and it was difficult for it to sustain that level. The market P/E has moved up at a faster pace than the earnings growth rate of the corporate sector.

So, what gives?