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Is Santa Claus coming to Dalal Street?

Indian stock market: Years with a Santa Claus rally were followed by a higher average yearly return of 15.32%, compared to 12.52% for non-Santa Claus rally years. (Here a child shakes hands with a person dressed up as Santa Claus) (Utpal Sarkar)Premium
Indian stock market: Years with a Santa Claus rally were followed by a higher average yearly return of 15.32%, compared to 12.52% for non-Santa Claus rally years. (Here a child shakes hands with a person dressed up as Santa Claus) (Utpal Sarkar)

  • Dalal Street will continue to see volatility and whipsaw-like movements as they respond to Omicron-related development and the monthly expiry

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Markets seemed to be getting into the Christmas spirit this week, with both the festive colours adorning trading terminals. After bleeding red on Monday, the exchanges lit up green, recovering significantly from their lows. This robust pullback may have signalled that the market is preparing to enter a phenomenon known as the 'Santa Claus Rally.'

During this rally, the stock market surges during the last five trading days of December and the first two of January. In the last ten years, the Nifty has seen this distinctive surge seven times out of ten. Remarkably, years with a Santa Claus rally were followed by a higher average yearly return of 15.32%, compared to 12.52% for non-Santa Claus rally years.

While there are numerous explanations and beliefs as to why markets react in this manner during this time period, the most popular notion is the lack lustre FII participation. In fact, FII activity during the Santa Claus Rally period has been observed to drop significantly when compared to the same 7 session time-frame the previous month. In the last six years, for instance, FII net trading activity in equities slumped by 39% on average during Santa Claus rally years, compared to a relatively lower average of 10.5% drop in other years. 

Due to lower contribution by FIIs, domestic investors dominate market sentiments during this period. Domestic investors more often than not tend to be bullish, propelling the market higher. Due to the high probability of this rally, investors view this period as an ideal opportunity to enter new investment positions, providing more ground for bourses to advance on. Nevertheless, investors should keep in mind that market sentiment currently is not overly optimistic, and uncertainties continue to surround us. Market participants should therefore exercise caution and watch if these green shoots build up to a 'Santa Claus Rally' this year as well.

Event of the week

The theme this week was 'IPOs aplenty!' with a plethora of companies making their D-street debut every single day. While all of the IPOs had a received multi-fold subscription, the enthusiasm surrounding IPOs started to diminish as the overall market attitude plummeted. As a result, despite substantial grey market premiums during subscription periods, successions of lacklustre listings were witnessed. 

Further, even IPOs that listed at a premium saw their listing profits fade away quickly. This served as a warning signal to market participants who perceive IPOs as a quick way to make money. Investors should therefore invest prudently in IPOs, focusing on the fundamentals and relative valuation of companies rather than solely the grey market premium.

Technical Outlook

Nifty50 index quickly bounced after testing the support of 16,400 but closed the week nearly unchanged. Nifty is also now trading within a downward sloping channel and continues to remain choppy. Bank Nifty index which was already reflecting weakness has broken the crucial support level and may retest the levels of 34,000. The overall undertone of the market has turned mildly bearish. Traders are advised to maintain a bearish bias as the upside is likely to remain capped at a resistance of 17,350. A decisive break above this level will negate this bearish outlook.

Expectations for the week

Markets will continue to see volatility and whipsaw-like movements as they respond to Omicron-related development and the monthly expiry. The week may see sectoral rotation, with beaten-down industries gaining traction. Because the underlying tone in realty and Auto is optimistic, a purchase on dips approach can be used. IT is gaining momentum and trading at all-time highs, aided by Accenture's stellar performance. Banks on the other hand, remain weak and are unlikely to see significant buying until the end of the year. Investors can further examine the monthly expiry rollover data to capitalise on sectoral rotation and identify if the Santa Claus Rally will occur. Nifty50 closed the week at 17,003.75, up by 0.11%.

Yesha Shah is head of equity research of Samco Securities

 

 

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