Apart from the Santa Claus effect, markets could turn because of Fibonacci’s magic.
What moves India’s equity markets? At any other time of the year, this would be a million dollar question but in December, it’s easy. Past record shows Indian markets gain in this month and lose in October. For nine successive years, the BSE-500 has delivered positive returns in December. Many call it the Santa Claus effect.
For the last nine years, the Sensex has returned anywhere between 3.18 per cent and 15.74 per cent in the month of December. One key reason behind this certain rise in indices, is the pressure of the year-end performance sheet that most foreign funds have to show. Equity strategists say foreign funds which follow the calendar year buy in December. This helps them push up the net asset value of their funds, as their bonuses are linked to the performance. Most of the buying happens in the mid-cap universe, as even small buying in these stocks can push up valuations substantially.
For instance, in 2008, the BSE-500 gained 9.14 per cent in December, while the Sensex gained 6.10 per cent. The month saw portfolio flows of Rs 1,319 crore. That would perhaps explain the positive FII inflows into equities in this month as well. Except for 2006 (which saw outflows of Rs 3,593 crore), December has seen positive FII inflows in the last decade.
So, will this year see history repeat itself? If marketmen and golden ratios are to be believed, the time’s right for the markets to turn. Technical chartists who diligently follow the Fibonacci series (list of critical numbers when things change) believe that after hitting a nadir in the last week of November, it should have completed the 55-week cycle, from which the markets should retract. In mathematical terms, the sequence of Fibonacci numbers is defined by the recurrence relation. Marketmen believe the markets touched a low in November as the 55-week series ended, which began in October 2010.
Kapil Mokashi, senior manager (advisory) at Sharekhan, explains: “The market believes that certain important things happen during the Fibonacci numbers. It seems that a bottom was in place in November, according to this series, so it won’t be surprising if markets turn this month.”
Fibonacci numbers form a sequence and the traders believe markets turn with these numbers. Last October, the markets completed the 34-week series and that’s when the Sensex topped out at 20,687 points. After 34, the next important milestone is 55 and this November, the Sensex hit a low of 15,695 points. From here on, technical chartists expected the markets to turn. Before October 2010, Fibonacci numbers had indicated in February 2010 that markets would turn after 34 weeks, when the Sensex was at 16,428 points and in October 2010, the markets did touch a new high. Let’s hope Fibonacci’s magic works this time, too.