Is this Counterproductive?

Different types of analysis are used in the stock market to make predictions. It is remarked many time that such analysis are trying to attach “science” to “madness”. Well to my mind it is all economics. However, different people use different forms of analysis. While, I may not me be able to understand or use all, I respect them all. It is a way people look at the markets.

One such form of analysis is when people use heat maps. A heat map is a graphical representation of data where the individual values contained in a matrix are represented with colors. I have been seeing them a lot but really don’t follow it much. At times I found them to be counterproductive.

However, recently I saw a heat map which made me re-think whether I should ignore it or not. The heat map was about Nifty monthly returns since 2003. While rest of the data points seemed to be normal, two things caught my attention. The months of July have been seriously unusual. Out of last 15 years July month has delivered negative returns only 3 times. This year it was the best performing month, returning 5.84% on Nifty.

Well, this was not the real big surprise. The big surprise came from the fact that a similar month is December. In last 15 years it has also given negative returns only three times. The average returns have been ~3% during December month. The best month in last 15 years except for May 2009, when Nifty hit upper circuit has been December of 2003. Last time we peeked out in December 2007, when Nifty returned ~6.5%; yet December 2008 was good month and Nifty returns were ~7%. So, net – net December does not seem to be that difficult a month for bulls.

But the study seems quite vague in the way it is. There should be more to it. Well, arguably one can highlight Gujarat State Election. But that is a binary event. The other argument is the way mid cap and small cap stocks are reacting it feels like we are in end of 2007. Does that mean are we going towards December 2007? Which makes me think, whether I should rejoice about December or be worried about January (referring to January 2008)?

Just the way price data gives confirmation; only price data cannot be treated as conclusive. So, I am waiting for more data points. I am sure the expiry week shall clear out the clouds. But undoubtedly we are heading towards an extremely eventful next series.

Happy Trading.

Cheers!!!