What does history tell about the Sensex behaviour after 5% decline in a day?
On 24 August 2015, the S&P BSE Sensex declined by 1,624 points or 5.94% to 25,741. On analysing data since January 1991, there have been as many as 40 occasions (excluding today) when the Sensex declined over 5% in a single trading day. On as many as 18 occasions, the decline was more severe than today. In the past decade there were 12 such occasions, most of which were during the period of the global financial crisis. The last time the 30-stock index fell over 5% was on 6 July 2009.
It is also important to note that each time the market has fallen over 5% or more, it has done so in three major periods. There were as many as 10 occasions between March 1992 and March 1993, another 10 occasions between February 2000 and September 2001 and 11 occasions between January 2008 and July 2009. Does today mark another day for future volatility? Or is it one of the rare few occasions seen in March 1991, January 1997, October 1998, May 2004 and May 2006? The only link to these periods is the market valuation which was extremely high at the beginning of each.
In March 1992, the Sensex price to earnings was quoting over 42 times. In February 2000, the PE was 23 times. In January 2008, the Sensex PE was over 22. In the remaining 9 periods, the PE ranged between 10-15 times, except for May 2006, when the PE was 20 times. As on 19 August 2015, the Sensex was quoting a PE of 22.16 times, a high valuation seen at the start of the major periods above.
How have sentiments played out on the day after the index declined over 5%? Moneylife analysed the returns 1-day, 1-week, 1-month and 3-months after such a decline.
On the day after a severe fall, there is a tie between the bulls and the bears. Out of the 40 occasions, on 50% of the occasions the bearish sentiment continued and the index closed in the negative. When the bullish sentiments prevailed, the index moved higher by an average of 3.64% over the 20 occasions. Even when the decline continued, the average fall was 3.57% on the next trading day.
However, if we look at the 5% or more declines of the past decade, of the 12 occasions, the Sensex declined further on eight occasions or 67% of the times. The average return on the next trading day works out to -0.85%.
A week later, the index moves in favour of the bears, closing lower on 24 of the 40 occasions since January 1991. On the 16 instances the market moved higher, it did so by an average of 6.51%. However, the index averaged a return of -4.98% on the 24 occasions it continued the fall.
Even over the past decade, the index closed lower a week later, on nine out of the 12 occasions or 75% of the time. Over the 21 instances the Sensex moved lower by an average of 3% over the week.
A Month Later
Even after 30 days, the bears ruled. The index moved lower on 24 out of the 40 occasions or 60%. On 10 such occasions, the market moved lower by over 10% in 30 days.
Out of the 12 occasions in the past decade, the index closed later on seven occasions. The index moved lower by an average of 2.64% over these 12 occasions.
Three-months post a major fall of 5% or more, on 22 occasions out of the 40, the markets closed lower. The index on most occasions struggled to move higher. But on the 18 occasions when it did, it moved up by an average of 11%.
Even over the past 12 occasions, the index closed lower on seven occasions. On an average, the index moved lower by 3%.
As seen above, there is no clear indication where the market is headed over the short-term. But given the high market valuation, the bearishness may persist.