The market fell in January. Based on past patterns, what should we expect? Here is a study of the historical behaviour of the markets over the past 25 years
The year has not at all begun well for the stock markets. The Sensex ended the month of January with a 6% decline over December of last year. How does this performance augur for the rest of the year?
Moneylife took a look down the historical data, searching for some clues in the market patterns. We started from the year 1986 when the Sensex had completed one year of operations. Over these 25 years, the Sensex has ended the month of January in negative territory 12 times (including this year).
How did the Sensex perform by the end of the first quarter on these 11 previous occasions? Our study finds that of these 11 years (excluding this year), the Sensex has ended the month of March down six times (compared to January closing).
More interestingly, the fall in the Sensex at such times has been more pronounced than the drop in the month of January (except in 2008). However, out of the 24 years (excluding this year), this March monthly trend of a fall in the index has been witnessed 14 times.
If we are to study the yearly performance of the Sensex over these 24 years, the conclusions are quite interesting. Only eight times in this period has the Sensex closed the year in negative territory compared to the previous year. In all the other years, the Sensex has turned in a positive performance. That translates into only a 33% probability of the market slipping below its previous year’s closing.
Interestingly, only twice in these 24 years has the market gone on a sliding spree throughout the year. This happened in the years 1995 and 2008, when the Sensex ended negative at all the three points of our study. What was common between these two years? These were the two years when the Sensex had opened at very high valuations. In 1995, the markets woke up to a P/E multiple of 45, making it the most expensive start to a new trading year ever. In 2008 too, the Sensex had to contend with a P/E of 22, which was higher than the preceding six years. The index proceeded to lose 21% and 52% respectively in those two years.
In valuation terms, the year 2010 does not have much going for it. Last year’s dramatic rally, when the Sensex surged 81% over the previous year’s closing, has left the index trading at a relatively high P/E of 19 at the start of the year. This leaves very little scope for the index to make any sort of headway going into the rest of the year—unless there is a dramatic surge in liquidity.
Indeed, based on this data, the January jitters for the markets do not bode well for the upcoming period. It remains to be seen whether the Sensex gets weighed down by the valuation or proceeds to script a sturdy performance in 2010.