21 September 2011

Nifty : Window Dressing?

The recent rally in Nifty, especially after today's 100+ point gain is making a lot of eyebrows raised amongst the Technical and Market Internal watchers. Apart from low volume, we can also see extremely low institutional interests in cash market. Many of them are pointing to the fact that September end is also a quarter end and hence a lot of "Window dressing" is going on by the fund managers.

If they are reporting equities they hold and their current prices and if I see a lot of losses in my opted fund, chances are much higher that I may pull out of it. This is what most retail investors do. So just to hide some of the pain, most of the fund managers buy (with low conviction and mainly to report better average prices) and hence create a rally during quarter ends.

I am not saying that all rallies during these time periods are due to this fund manager gimmick, they can be genuine buying or just an oversold counter trend rally caused by short covering. But the table below will certainly beg for reasons why quarter end months tend to be good for equities.

I have pulled Nifty monthly returns (approximate) of these months since 2007, I have also noted the returns from the previous month. The highlight is green if the quarter end had positive return and the month earlier was negative, yellow if both were positive and red if quarter end was negative.

As you can see, out of the 4 occurrences of a negative return 3 were in 2008 (a year which most of the fund managers would like to forget) and another in June 2009, after a 27% rally the month before it hardly mattered what prices they were showing.

In a sample of 18 months 14 are showing positive returns (78%), whereas during the same period (when we consider all months and not just quarter ends) out of 56 months 32 show positive returns (57%), certainly a significant difference to be considered random.

So is the current rally another artificial propping, if yes then we can surely see this money going off the table pretty soon.


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