Devising A Budget-Related Strategy

History repeats itself. This is the basic assumption on which technical analysts base their reports. However, there are many other factors like the financial performance, news base stock movement, any policy change with respect to the industry in which the company functions, etc which affect the stock price. We at DSIJ decided to take a look at two factors simultaneously i.e technical analysis as also the impact of events on the movement of stock prices.

For this purpose we have taken into consideration the movement of the Sensex for the months of February and March over the past 11 years, the reason being that this is the time when the annual budget is presented. Of course there are also other factors that affect the broader performance of the market during these two months. The following table shows the Sensex returns for the above mentioned months:

 The data indicates that for most of the time the Sensex has shown a substantial reverse movement for both the months. If February has seen a positive return than March has witnessed a negative return. There is an exception for 2006 when the market rallied sustainably for both the months. Also one should note that in the year of 2004 and 2009 there were two Budget announcement one in February and the second in the month of July. For the month of July Sensex gave returns of 7.81 per cent and 8.11 per cent returns in 2004 and 2009 respectively.  An interesting factor is that in the past 11 years (except 2012) both the months have yielded six times’ negative returns and five times’ positive returns.

With the Congress suffering a massive setback in the recently held assembly elections in the states of UP, Goa and Punjab, one may see the FM introduce a more populist approach while presenting the Union Budget 2012-13. If the policy-paralysed government presents a reformist budget the market could rally further for the month. But this seems unlikely and we may see the market moving southwards, thus continuing the historic trend. Investors are therefore advised to trade on a cautious note and wait for the implications of the budget to become clear before making the next move.