The Sensex has been on a rally for seven consecutive weeks now. From 16,153 on 11 February 2010, it has rallied to a high of 17,644 for the week ending 26th March. Will this rally continue or is it time for the index to shed some of its gains?
Regular readers would be aware of the study done by Moneylife of the past performance of the Sensex when the index had witnessed a similar rally for weeks on end. The study is based on weekly market data from 5 January 1990. It has so far accurately predicted the continuation of the rally in its sixth and seventh week. However, the chances for an encore in the eight week do not appear so robust.
During this period of 21 years, there have been 16 instances of a sustained rally in the Sensex for seven straight weeks. What happened in the 8th week in these 16 cases? In eight instances, the subsequent week has reported a continuation in the Sensex rally. A 50% positive outcome (8 out of 16) is hardly comforting. Therefore, the probability that the rally will continue this week as well does not seem that likely.
On those occasions when the Sensex has actually continued its momentum, it has risen by an average of 1.85%. The index has seen a maximum gain of 3.63% and a minimum gain of 0.17%. In the eight instances when the Sensex has actually reversed its trend following a seven-week rally, it has averaged a drop of 2.50%, with a maximum fall of 4.70%.
For those who are betting big on the market, our advice would be to exercise caution. The chances for a reversal are getting higher. The markets may take a breather after this prolonged rally. On the contrary, the macro-environment of low interest rates in developed nations may mean than the index will continue to surge. — Moneylife Digital Team