A Man-Made Act Of God

The Budget looms over the Indian market almost like an act of God. How will stocks react? A technical analysis of the historic pattern of Budget-related movements.

Technical analysis predicts future market direction by studying the price patterns, accompanying trading volumes and underlying liquidity factors such as interest rates. The basic assumption is that all relevant public information will automatically translate into the share supply/demand equation and be discounted by the market movements itself. The secondary assumptions are that market and information dissemination mechanisms are reasonably efficient.

Market movements cannot reflect acts of God. Nor can it accurately handle crises such as wars, a sudden scandal,etc. Because by definition, these are not publicly available information and cannot be discounted by previous market action. So the predictive mechanism breaks down.

 

The Budget can be classified as an anticipated act of God. Everyone knows it will occur and it will crucially affect the economy. Everyone spends a lot of time predicting the direction that the Mand-arins and their political masters will take. But no one knows for sure. The information is not public until that fateful session.

So though the market gets jittery, rumour-driven and speculative, it lacks strong direction pre-Budget. Post-Budget analysis also carries a random element because the impact of specific actions such as changes in excise structure are difficult for even experts to work out quickly. Hence key industries often see a yo-yo effect after the Budget.

As far as technical analysts are concerned, the first four months are ruled by initially, looming Budget expectations and then, by reactions to the actual announcements. Thus, January-April sees moves which can only be accounted for by that manmade Act of God.

Still, there is a clear historic pattern of market moves both prior to and post Budget. In general, the Budget usually disappoints operators and it is a safe bet at odds of 3:1 that the market will see a sharp drop in March and April post -Budget. This seems to recur year after year with only two exceptions in this decade.

In July 1991, the market was extremely relieved by the installation of the Rao government and Manmohan Singh. The Balance of Payments Crisis forced liberalisaton as even the Left parties admitted that strong measures were necessary. Also by the stage, the Scam was already underway releasing lots of investible fun-ds despite apparently high interest rates.

The next Budget in February 1992 saw the Scam culminate. Though Budget 1992 consistently followed the NEP and Chelliah Committee report, the Budget pronouncements were not the key factor in the next six weeks. There were huge quantities of funny money flowing through the system and the bull run turned into a feeding frenzy for sharks.

On every other occasion in the 1990's, the Budget has been preceded by a narrowing in trading interest. Trade has concentrated in the pivotals. Usually the Sensex has shown gains leading upto Budget week. But these gains have come despite negative advance-decline ratios and sluggish moves in broader indices.

The Budget session usually sees violent swings and a complete absence of quotes of B and B1 scrips. Post-Budget, the market has declined the last six times. It has gone into a complete tailspin several times, notably in 1993 and July 1996.

We have taken a look at the last seven Budgets and market movements through January-April and between June-August 1996. It indicates a pattern of a rising and narrowing market prior to the Budget and usually a sharply falling market post-Budget. We have used the Sensex and Allshares indices respectively as our pivotal and broader market indicators.

A look at the Budgets

February 92

The frightening exception to the rule of post Budget slumps was inspired by the Harshad Mehta Scam. The market had been moving up for quite a while and a long term bullmarket was close to its peak. The year opened with the Sensex at 1957 points while the Allshares was ruling at 146 points. By Budget session the Sensex had reached 2830 points which was a 44 per cent rise in 2 months. The Shares had similarly gained 26 per cent. Despite badla levels ruling high, the bulls were still burning easy money. The market went berserk after the Budget. In the next six weeks the Sensex gained 60 per cent climbing to an extraordinary high of 4547 points in mid- April. The Allshares moved up to 296 points which was also a 60 per cent gain.

Then the bubble broke. By December