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Jan 03, 2018 09:55 PM IST | Source: Moneycontrol.com

Last 10 years data suggests that January belongs to bears; will the history repeat?

The liquidity-driven rally pushed the equity markets higher not just in India but across the globe. The only difference being that for India it was domestic institutional investors (DIIs) which led the charge.

Kshitij Anand @kshanand

The Nifty50 closed the year with robust gains of about 29 percent but anecdotal evidence suggests that the month of January belonged to the bears.

But, the way markets have moved in the last 12 months despite small corrections chances are bulls might rule the first month of 2018. However, it has to respect its crucial support placed around 10250.

History suggests that almost 60 percent of the times, the Nifty index closed the month in the red. The index suffered its worst loss in the year 2008 when it plunged by about 16 percent, followed by the year 2011, down 10 percent, and 2010 when it slipped by 6.6 percent.

The index closed in 4 out of the last 10 years. The index rallied the most in the year 2012 when it gained 12 percent, followed by the year 2015 which saw gains of 6.3 percent, and in the year 2017, Nifty hit fresh record highs and closed with gains of 5.6 percent, according to an AceEquity data.

“The Nifty50 used to have a high seasonality effect for the month of January to be a bearish month which has now been normalizing in effect. Sell in December buy in January used to be an evident trade due to expectations from Institutional activities but as the market mature, the odds have gradually reduced,” Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited told Moneycontrol.

“After conducting independent studies with respect to technical, Open interest and Volatility to analyze the possible market movement, we conclude that January effect of being a significantly negative month has lower odds,” he said.

Agarwal further added that with multiple studies coinciding to 10400-10500 being a strong support area for the month of February and a possible upside of over 11000, the temporary decline can be used to accumulate with a stop of immediate support of 10250.

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Indian market rose in line with rally seen in other global markets. The liquidity-driven rally pushed the equity markets higher not just in India but across the globe. The only difference being that for India it was domestic institutional investors (DIIs) which led the charge.

History suggests that foreign institutional investors remained net sellers in Indian equity markets in 6 out of last 10 years. When the index fell a little over 16 percent in the year 2008, FIIs dumped equities a net of Rs17,326 crore, followed by Rs11000 crore selling in the year 2016, and about Rs6000 crore selling seen in the year 2011.

On the other hand, MFs remained net sellers in 5 out of last 10 years. They pumped in huge money in the year 2016 when the net amount crossed Rs 6700 crore, followed by Rs5000 crore infusion in the year 2017, and Rs 5500 crore was pumped in back in the year 2008.

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Domestic mutual funds pumped in a staggering over Rs 1 lakh crore in the stock market during 2017 and remain bullish in the New Year to maximise the returns for investors.

Mutual funds invested Rs 1.2 lakh crore in equities in 2017, much higher than over Rs 48,000 crore infused last year and more than Rs 70,000 crore pumped in during 2015, latest data with the Securities and Exchange Board of India (Sebi) showed.

Retail participation is now providing the much-needed liquidity to the stock markets that have been largely driven by Foreign Portfolio Investors (FPIs) for the past few years.

FPIs have infused close to Rs 50,000 crore this year after putting in over Rs 20,500 crore last year and nearly Rs 18,000 crore in 2015. Prior to that, they had pumped in over Rs 97,000 crore in 2014, said the report.

Valuations no longer cheap:

After a strong rally seen in the last 12 months, valuations does look stretched but the downside still remains limited. Strong macro data is also contributing to the positive momentum apart from Crude which is still trading above USD 65/bbl.

The latest data on the manufacturing sector suggest that there is some pickup in the economy.

The Indian manufacturing sector ended the year on a strong note, with operating conditions in December improving at the strongest rate in five years driven by significant increase in new orders, a monthly survey said.

The Nikkei India Manufacturing Purchasing Managers' Index (PMI) rose to 54.7 in December, from 52.6 in November as growth was recorded across all three monitored categories -- consumer, intermediate and investment, said a report.

“At current valuation, trailing PE of Nifty is 26.8x & Sensex is 25 times -- market is not Cheap; however, downside remains limited as we are in an Earnings revival trajectory as disruption caused due to GST implementation & Demonetisation are slowly fading away,” Soumen Chatterjee, Head of Research, Guiness Securities told Moneycontrol.

“Most of the macro indicators like CAD & Low-Interest rate regime likely to have topped out & the best is behind us as crude prices have surged. The 10- year bond yield has moved up around 90 bps in the past few months on expectation of higher inflation due to crude,” he said.

Chatterjee further added that he doesn’t expect any major correction in coming days as headwinds like rising Fiscal Deficit & Fed rate hike are likely to fade slowly as the market starts captivating on good corporate earnings.
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