Sucheta Dalal :A straight five-week rally—where are we headed?
Sucheta Dalal

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A straight five-week rally—where are we headed?   

March 16, 2010

The thirty-share BSE Sensex has been on a roll for the past few weeks. The Sensex has surged 6% to 17,166 for the week ended 12 March 2010 from 16,125 recorded for the week ended 11 February 2010. The index has been rising continuously for these five weeks. Will this rally continue or is it time for the index to shed some of its gains?

Moneylife did a study of the past performance of the Sensex when the index had reported similar growth for a span of five straight weeks. We found some interesting patterns in the data.

We looked at Sensex data from 5 January 1990 up to the last week. We found that during this period of 21 years, there have been 33 instances of a sustained rally in the Sensex for five straight weeks. What happened in the 6th week in these 33 cases? In 22 instances, the subsequent week has reported a continuation in the Sensex rally. A 66% positive outcome (22 out of 33) is significant. On these occasions, the Sensex has risen by an average of 2.44%. The index has seen a maximum gain of 9.78% and a minimum gain of 0.21%.

So does this mean that the Sensex will continue its solid show in the coming week? The data and fundamentals strongly confirm this, but a lot would depend on how the global indices fare in this period. The market is strongly up this week already.

It should also be noted that, on several occasions, the Sensex has faltered and failed to carry on the momentum into the sixth week. In the 11 instances when the Sensex has actually reversed its trend following a five-week rally, it has averaged a drop of 2.13%, with a maximum fall of 4.56%.

In case the Sensex follows the trend and continues its momentum, what can you expect in the subsequent weeks? Out of the 22 instances when the index has rallied for six straight weeks, it has carried on its growth into the subsequent week 17 times, with an average return of 1.96%. Thus, history appears to be strongly in favour of the index growth to stay in positive territory for the coming weeks. Unless global markets get cold feet, the Sensex looks set to spurt along for a few days. Beware, however, that the chances of a reversal are getting higher. An 8th consecutive week of rally happened in eight cases (out of 17 occasions when the Sensex rallied for seven weeks in a row). And a 9th consecutive week of rally took place—on five out of eight occasions.—Moneylife Digital Team


-- Sucheta Dalal