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The stock markets have rallied strongly for the past eight consecutive weeks. The historical trend favours a continuation of the rally, but will the market prove it wrong?
The Sensex has been on a rally for eight consecutive weeks now. From 16,153 on 11 February 2010, it has rallied to a high of 17,692 for the week ending 1st April. Will this rally continue or is it finally time for the index to shed some of its gains? The study done by Moneylife looking into the past performance of the Sensex when the index had rallied similarly for weeks has fairly accurately indicated that the rally would continue into the sixth, seventh and eight week. The study is based on weekly market data from 5 January 1990. Although the study showed that the chances of the index continuing its momentum in the eight week are exactly 50%, the markets did go on to register a marginal rise (0.30%).
Will the market sustain its upswing into the ninth week also? During this period of 21 years, there have been seven instances (excluding this year) of a sustained rally in the Sensex for eight straight weeks. What happened in the 9th week in these seven cases? In as many as five instances, the subsequent week has reported a continuation in the Sensex rally. That translates into a meaty 71% positive outcome.
On these occasions, the Sensex has risen by an average of 2.69%. The index has seen a maximum gain of 4.30% and a minimum gain of 0.90%. However, in the two instances where the index has reversed its upward climb, it has witnessed an average fall of 2.5%, with a maximum fall of 4.70%.
Historical data definitely suggests that the Sensex winning streak will roll onto the 9th week. However, it would be wise to note that liquidity will play a key role in supporting this rally from here onwards.
The sustained rally in the markets so far has been fuelled by strong inflows from foreign investors and rising global indices. Reducing unemployment figures in the US and positive developments in the Greece debt situation have aided the global markets. For the Sensex to continue its upswing, a lot will depend on what the central bankers around the world choose to do with monetary policies.