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Not Making the MOSt of it

Motilal Oswal Mutual Fund’s first product will be an exchange-traded fund. It has three major...

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Is an eighth straight day of rally likely?

The stock markets have rallied strongly for the past seven consecutive days. How will the markets perform today? We look at similar historical patterns to get a picture

The 30-share BSE Sensex has been on a roll for the past seven days. The Sensex has surged 6% to 17,617 on 17 June 2010 from 16,617 recorded on 8 June 2010. The index has been rising continuously over these past six days. Will this rally continue or is it time for the index to shed some of its gains?

Moneylife did a study of the past performance of the Sensex when the index had reported similar growth for a span of seven days. We found some interesting patterns in the data.

We looked at Sensex data from 1 January 1991 up to yesterday. We found that during this period of 20 years, there have been 33 instances of a sustained rally in the Sensex for seven straight days. One of these was on 2 March 1992 when the Sensex went up 10% two days after Dr Manmohan Singh presented a Budget that sent the market on fire. Big Bull Harshad Mehta was on the rampage at that time, which two months later led to the Securities Scam. 

What happened on the eighth day in these 33 cases? In 18 instances, the subsequent day has recorded a continuation in the Sensex rally. A 55% positive outcome (18 out of 33) is not significant, but a pointer nonetheless. On these occasions, the Sensex has risen by an average of 1.52%. The index has seen a maximum gain of 10% and a minimum gain of 0.01%.

It should also be noted that, on several occasions, the Sensex has faltered and failed to carry on the momentum on to the sixth day. In the 13 instances when the Sensex has actually reversed its trend following a five-week rally, it has averaged a drop of 2.04%, with a maximum fall of 5.71%.

In case the Sensex follows the overall trend and continues its momentum, what can you expect on the subsequent day (ninth day)? Out of the 18 instances when the index has rallied for eight straight days, it has carried on its growth on to the ninth day 11 times. This translates into a positive outcome of 61%. Thus, history appears to be mildly in favour of the index to stay in positive territory for the coming couple of days.

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