Stock market rally: Low FII activity may spark Santa Rally on D-Street, shows history

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Markets this week seemed to be embracing the Christmas spirit as both the festive colours adorned trading terminals. After bleeding red on Monday, bourses lit up green recovering significantly from lows. This strong pullback might have hinted that the market is getting ready to launch itself into a phenomenon widely termed as ‘Santa Claus Rally’.

This phase exhibits a stock market surge through the last five trading days of December and the first two days of January. In the past ten years, Nifty has borne witness to this peculiar surge seven out of 10 times. Interestingly, the years with a Santa Claus Rally have been followed by a higher average yearly return of 15.32% against an average 12.52% returned by Non-Santa Claus Rally years.

While there are various pretexts and beliefs as to why markets react this way during this time period, the most popular belief is the lower participation by FIIs.

As a matter of fact, FII activity in the Santa Claus Rally period has been observed to drop substantially compared with the same 7 session time-frame of the previous month. For instance, in the last 6 years, FII net trading activity in the equity space dropped by ~39% on an average during Santa Claus Rally years as against a relatively lower average of ~11% drop in other years. This lower contribution by FIIs puts domestic investors in charge, who tend to be bullish more often than not thereby propelling the market higher. Due to the high frequency of its occurrence, investors tend to view this period as an ideal opportunity to undertake fresh investment activity, providing more grounds for bourses to advance. However, investors should keep in mind that currently the market sentiment is not overly optimistic and uncertainties continue to surround us.

Market participants should therefore be cautious and watch if these green shoots culminate into a ‘Santa Claus Rally’ this year as well.

Event of the week

‘IPOs galore!’ was the prominent theme this time around with a slew of companies making their market debut every single day of the week. While all the IPOs received a great response with multi-fold subscriptions, the sentiment of the broader markets turned sour, dampening the primary market euphoria. This, in turn, led to a series of tepid listings, despite healthy grey market premiums during subscription periods. Moreover, even the IPOs that listed at a premium saw their listing gains evaporate soon. This came in as a warning sign for those market participants who view IPOs as a quick money-making opportunity. Investors should therefore invest wisely in IPOs, keeping fundamentals and relative valuation of companies at the forefront and not just the grey market premium.

Technical Outlook

ET CONTRIBUTORS

Nifty50 quickly bounced back 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
Volatility and whipsaw like movements will continue as markets react to Omicron related developments and the monthly expiry. The week may witness sectoral rotation with beaten-down sectors picking up pace. The underlying tone of Realty and Auto is bullish, so a buy on dips strategy can be adopted. IT is showing strong momentum and is trading at all-time highs backed by Accenture’s splendid performance while banks continue to be vulnerable and are unlikely to witness major buying at least till the year-end. Investors can further analyse the monthly expiry rollover data to take advantage of sectoral rotation and to determine whether the Santa Claus Rally will play out.

Nifty50 closed the week at 17,003.75, up by 0.11%.

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