Want To Make A Killing In Diwali Season On The Bourses, Tread With Caution

Diwali is the most revered festival in India. Apart from routine celebrations of making sweets, visiting relatives and decking up, people also burst crackers and worship Goddess Lakshmi who is also known for the Goddess of Wealth. 

It is one of occasions when Hindus not only perform puja for the wealth goddess but as a mark of respect also indulge a bit. So while some trade in stocks, a select section of people gambles a bit, many people buy gold, consumer durables, new clothes and the like.

Considering that it is also the first day of the Gujarati calendar, businessmen and traders belonging to this community consider this to be very important and sacred.

Hence, the celebrations tend to continue for 3 to 4 days. As we write this cleaning is in progress in our homes to welcome Goddess Lakshmi.

Thus, we find that Diwali finds a special place not only from a festival perspective but is also associated with wealth, wellbeing as well as the New Year. Hence, there is a lot of money that gets spent during Diwali time by an individual as well as a family.

Keeping with this tradition and respecting the auspicious occasion the stock exchanges in India have a special trading window. This trading window is called mahurat (inaugural) trading and is normally done between 6 to 7 pm on the day of Diwali.

This is the only time when the stock market is open in the evening and all norms are also followed with respect to settlement, margins etc. with respect to the trading of shares.

A lot of sentiment is attached to Diwali both during and the run-up to the festival.

With so much of importance and significance associated with the festival, we have analysed the returns generated during Diwali period since the year 2000. We have broken this period into 2 parts:

1)         1 month prior to Diwali, and

2)         1 month post Diwali

We have computed the returns generated during both these periods separately and compared them. The following table depicts the returns during the last 20 years of one month prior and one month hence from the day of Diwali.

Diwali day is the numerator for the 1 month prior period calculation and it is the denominator in 1 month post / hence period calculation.

So if the returns in the 1 month prior to Diwali are negative then it means that on Diwali day the Nifty 50 closed lower than the day 1 month prior to Diwali.

And if the returns in the 1 month prior to Diwali are positive then it means that on Diwali day the Nifty 50 closed higher than the day 1 month prior to Diwali.

Similar Logic Applies for Post Period Calculation.

Diwali is on November 14, 2020 this year. The Nifty 50 index as on October 15, 2020 was 11,680 which means based on November 6, 2020 index level of 12,263 the return so far is ~5%. So, if the index level remains higher than 11,680 till next weekend then the return will continue to be positive.

A combination of positive / negative returns Pre-Diwali and Post-Diwali is shown in the table below:

It is pertinent to note that only once in the past 20 years, Nifty has been lower both before and after 1 month of Diwali day and that was in 2015.

Interestingly, if the market generates positive returns during the 1 month prior period, then there is ~61% probability of it also generating positive returns during the period ending 1 month post Diwali.

Overall 70% of the times, 1 month after Diwali the Nifty has closed higher than the Diwali day closing. The same figure for the 1 month prior Diwali period is 65%.

Even if Nifty generates negative returns during 1 month prior period, then the probability for generating positive returns in the post Diwali 1 month period is very high at 85%.

To conclude there is a 70% chance of the market to remain higher 1 month post Diwali compared to Diwali day’s closing irrespective of its performance prior to Diwali. So, if you want to dabble in stocks, this Diwali season, tread with caution.

Image Credit: The Indian Express

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