Sunday, May 29, 2011

In omens, markets trust

Did mommy dearest feed you sugar and curd before you embarked on exams? Or was the almanac consulted to figure out a ‘good time' to commence long journeys? Welcome to the club. A lot of us Indians have a special thing for omens and superstitions. Fact and logic is all well and good, but hey, are the stars aligned right? So, Rahu kaal, a black cat crossing the path, twitching of the eye, cawing of the crow, a lizard falling on various parts of the human anatomy, and a long list of such ‘future portenders' are closely tracked and play a key role in the what, when, where and how of our decisions.
To an observer, it would seem that the powerful and the moneyed are more susceptible to the superstition phenomenon. That may well be true. After all, they probably have more to lose (at least in absolute terms). And as the wise say, higher the stakes, greater the insecurity. So, it also goes that omens, superstitions and quirks abound in stock markets, the Mecca of the moneyed and the wannabe-moneyed. Anything that has predictive power, no matter how tenuous, commands attention on the bourses.
Here's a list of some interesting ‘can't-be-proven-but-it-exists' phenomena which contribute to the song and dance on the stock markets.
Muhurat mojo
Well begun is half-done! So come “Muhurat trading” on the commencement of the traditional New Year during Diwali every year, and the Sensex invariably moves up. Many investors place symbolic buy orders that day to mark their fresh trades. Since 2000, on all occasions but one, the Sensex has risen on Muhurat day. Thus, in the belief that as Muhurat goes, so goes the year. This is quite similar to the ‘January effect' believed to operate in several global markets.
Uncannily, the Muhurat trade has proved its predictive power time and again. In seven out of nine cases from 2000 to 2009 when the Sensex rose on Muhurat day, the market followed suit in that year. And in the sole case when the Sensex dipped on Muhurat day (November 2007), the year ahead was one of severe value destruction for all global financial markets including India. So, there could be hope that the recent market downturn is but a temporary phase, and the 111 point rise in the Sensex in November 2010 will eventually translate into good tidings for the market this year. But this superstition battles with the unlucky reputation of the Nelson's number! To follow yet another superstition, let's keep fingers crossed!
Gruhlaxmi sentiment
Ours is a country of huge paradoxes. On one hand, the latest census numbers show continued discrimination against the girl child. But on the other, there are investors who make stock market investments only in the name of the lady of the house (Gruhlaxmi).
This applies especially in the case of fresh issues in the market. The belief is that when Laxmi, the Goddess of wealth (symbolised by the lady in the house) makes an investment, the chances of it appreciating are enhanced.
Sell not on Fridays
As an extension of the above sentiment, some investors are loath to making sales on Fridays.
It is believed that selling on a day Laxmi is traditionally worshipped may not be a good idea. As the thought goes, it just isn't worth the risk of antagonising the Goddess of wealth!
Relying on Reliance
Then there are those traders whose first bet for the day is invariably Reliance Industries, in the belief that the stock “never disappoints shareholders”. These are usually the old-timers who swear by the company which created the equity cult in the country. However, with the market behemoth underperforming for the last two years, such investors just may have got their calls wrong.
Sell in May and go away
This investor maxim, quite in vogue on Wall Street also has takers in India. Empirical evidence in the US seems to suggest that the best time to stay invested is from November to April, while the May to October period usually produces negative returns. However, this seasonal trading belief has had a chequered record in India, with the Sensex dipping in only 7 out of the 12 Mays since 2000. Perhaps it's the heat, perhaps it's coincidence, but in any case, a 58.33 per cent success record for a superstition doesn't inspire too much confidence.
Other much talked about ‘effects' include the Monday effect (with markets often disappointing in the beginning of the trading week), the October effect (when some of the worst market crashes in history have occurred), the Santa Claus effect (when stocks are thought to surge in the last week of December) and the eclipse effect (when celestial body-induced mood swings are believed to precipitate a downhill movement in the markets).
A jog down memory lane throws up the interesting accusation levelled by Dalal Street traders during the market crash in January 2008. They blamed the recently installed bronze statue of a bull (more specifically its positioning) in the Bombay Stock Exchange for the market's ills. The bull, they claimed, was ‘panvati' (bringer of ill-luck). Markets apparently sought a scapegoat , or in this case, ‘scapebull'.
In an uncertain, high-stakes environment, investors clutch on to almost anything which helps negotiate markets. This behavioural bias - the ‘anchoring effect' - is the genesis of most market superstitions and quirks.

Indians are superstitious, even in the stock market.

No comments: