What 'Diwali Effect'?

In an earlier post entitled, 'Diwali Should Drive Indian Market Growth', I compared the performance of the Indian stock market before and after Diwali. For 10 years from 1997 to 2006, the BSE sensex has gained an average of 0.62% in the 60 days leading up to Diwali and an average of 7.42% after Diwali. That is a significant difference in performance and makes us suspect Diwali has a market-lifting effect.

Lets see how the Diwali Effect fared in 2007, as January 10th marks 60 days after Diwali (November 10, 2007).

For the 60-day period preceding Diwali, the BSE sensex soared 21.23%; for the 60-day period after Diwali, the BSE sensex went up by 8.86%. We cannot clearly say that Diwali Effect made any difference this year.

In fact, I think the economic expansion in India has reduced the Diwali Effect to a level of white noise; as such, the Diwali Effect did not matter this year.

Additionally, the U.S. slowdown might have shrunk the returns for this period. The performances of the S&P 500 for the same periods were +0.14% and -2.27% respectively.

As mentioned in the earlier posting, the globalization effect on the Indian market is far outstripping domestic influences and hence, the Diwali Effect was not very pronounced.

The following chart illustrates how Indian Mutual funds and ETfs performed for the periods before and after Diwali 2007.

click to enlarge

Disclosure: Author is long the Indian market.

Comments

[debussy]

If the performance for IIF and IFN are based on the stock price as of 60 days post Diwali - the above bar chart is probably incorrect. IIF issued a hefty dividend almost $11 out of $55, and I am sure IFN did so too towards the end of the year. I own IIF, and I got 61 shares for about 280 I owned prior to the distribution.

The debunking of the Diwali myth is probably correct nevertheless.

[hattryx]

I was not aware of seasonal/annual cycles in the Indian market. Interesting..

[gaurav verma]

There is a logical issue here. Diwali, per se' is a season in which all Hindus buy new things for themselves, there are mega or bumper deals in the market and a lot of gifts are bought too. This propels the market with a spurt of consumerism for sure.

Why it may not be showing up that transparently in the India centric ETFs can also be because the ETFs' holdings and their composition. But you have to understand the significance of the festival to comment on the so called myth. I do not think its a myth.

The same phenomenon happens around the new year in China too.