The Sensex has registered gains for seven straight quarters, with the September quarter witnessing a gain for around 13%. Never before in history has the Indian capital market gained for seven straight quarters. On previous occasions, the market has gained a maximum for five straight quarters on four occasions (see table).
What happens post such long quarterly rally? An FE study of Sensex quarterly returns since 1979 found that whenever the market has seen uninterrupted gains for five quarters, the subsequent quarter has seen a steep correction. The quarterly fall in Sensex values during such period has been anywhere between 6% and 28%. By that logic, the Sensex could be anywhere between 14,600 and 19,100 by end of 2010, if history were to repeat itself. Author of Gloom, Boom and Doom report and investment guru Marc Faber was recently quoted as being bearish. He is expecting a correction in global equities market by year-end. All market participants though aren?t doomsayers. ?A V-shaped market recovery is followed by periods of consolidation. Next year is likely to remain range-bound, as earnings catch up,? said Jyotivardhan Jaipuria, managing director and head of research, BoA Merrill Lynch, India.
The last time Sensex gained for five quarters or more in a row was in 1993-94, which was followed by a correction of 8.2% in December 1994 quarter. Largest quarterly decline post such long rally though happened in the June 1992 quarter, when the market fell a whopping 28%. Highest relative valuations among emerging markets, chances of earnings downgrade in Q2, a weak macro environment and a heavy equity pipeline could keep the market at 20,000-plus levels, believes a section of the market.
?The key upside risk to our tactically bearish investment thesis on Indian equity markets is coming to pass, as foreign portfolio flows accelerate and fundamentals and valuations take a backseat,? mentioned a recent India Strategy report by RBS. It added that looking at the September 2007 to January 2008 period could provide investors a road map to a possible market ?blowout?.
The Sensex has almost doubled in past seven quarters. It added a whopping 10,422 points, or 108%, to 20,069 on September 30, 2010 from 9,647 on December 31, 2008. However, in percentage terms the five quarter rally seen from March 1991 and March 1992 saw the Sensex actually quadruple. This time around though the market surprised everyone through its relentless gains, which surpassed beyond five quarters. It needs a mention that for few quarters while returns were positive the gains were almost flat.