Sucheta Dalal :Fifth quarter straight rally—but what lies ahead?
Sucheta Dalal

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Fifth quarter straight rally—but what lies ahead?  

April 5, 2010

The thirty-share BSE Sensex has been on a roll for the past five quarters. Although the Sensex ended the March quarter only marginally higher than the December closing, it now means that the Sensex has been surging for the past five straight quarters. Will this momentum continue or will the markets take a breather?

Moneylife did a study of the past performance of the Sensex when the index had reported similar growth for a span of five straight quarters. We found to our surprise that the outcome for the subsequent quarter—after the rally in the previous five quarters—was the same throughout.

We looked at Sensex data from 29 January 1979 up to the last week. We found that during this period, there have only been five instances of a sustained rally in the Sensex for five straight quarters. What happened in the 6th quarter in these cases? In all instances, the subsequent quarter has reported a substantial decline in the index level. That is an astounding 100% negative outcome. On an average, the Sensex has dropped by 13% on such occasions (not including the current quarter).

So does this mean that the Sensex will be unable to sustain its solid show in the coming quarter?

Regular readers of Moneylife would be aware of a similar study of the past performance of the Sensex when the index had witnessed a rally for weeks on end. The study accurately predicted the continuation of the index rally in its sixth and seventh week.

We also pointed out, based on this data, that the chances for an encore in the eighth week did not appear so robust. We had advised readers to exercise caution as chances of a reversal were getting stronger and that the markets may take a breather after this prolonged rally.

Surely enough, the eighth week saw the index snapping its seven-week rally, with a drop of 0.5% over the previous week. This definitely lends some support to the contention that the Sensex is likely to end up closing lower in this quarter compared to the March quarter.  Moneylife Digital Team

-- Sucheta Dalal