Nifty 50, a flagship index listed on NSE in the Indian stock market, is trading at an all time high price. The index marked the highest price since last 1 month on 23rd February.
Flagship index Nifty can be seen trading in a small range since last one week forming a Narrow Range 4 ( NR4 ) pattern. Finally on Friday, the index broke out of this narrow range but failed to sustain closing at 110 points lower than its day’s high.
We talked in detail about Nifty50’s seasonality trend in a post earlier. Let us now check if the index will continue its bullish move upside, or if it will follow its seasonal tendency.
Nifty declines most from January to march
If we compare Nifty’s monthly average returns in the last few years, the index tends to be weaker in the first half of the year compared to the second half. This seasonal pattern suggests Nifty may see a correction in the coming months.
Specifically, the monthly average returns data over the last 10 years shows Nifty has returned only 0.64% on average during January-June. In contrast, the index has returned 1.51% on average during July-December, which is 2.35 times higher.
The 20-year monthly average returns data tells a similar story – Nifty returned just 0.505% on average during the first six months, compared to 2.33% during the next six months, which is 4.65 times higher.
January in particular has historically been the weakest month for Nifty, with the lowest average monthly return over the last decade.
Other indices like Bank Nifty, mid-caps, and small-caps have shown a similar seasonal pattern of weaker first half performance. Bank Nifty has steadily declined in the first couple of months of the last 5 years, before rebounding from July onwards.
Why Nifty may decline by 10 percent in coming months
Given we are currently in February, if this historical seasonality pattern holds true, Nifty could see a correction of around 10% in the coming 3 months until May or june. Last month, the index witnessed signs of indecisiveness and formed a Doji monthly candle.
As we approach the end of the financial year (March 31), Short term investors tend to book their losing position for ‘Tax Loss harvesting’ , which helps them with taxes by mitigating losing positions. This can be another reason for the decline of the Nifty 50 in the coming month.
Another reason is the rise in India Vix which measures volatility in the Indian Market. When Implied Volatility rises, fear in the market among the investors increases. Fear and IV are directly proportional (check how India Vix affects option traders). Also the Market Mood Index (MMI) is at 40 and has stayed the same since last 1 month.
When Nifty (considering it as overall market) entered this fear zone, any triggered selling may lead to continuous strong sell off as investors are fearful of losing on the profits. All reasons combined along with seasonality factors at play, we might witness Nifty falling to lower levels.
If Nifty falls what can be done?
Looking from a long term perspective and considering the fact that India’s economy is growing at a faster rate than the last few decades, Nifty is sure to cross the 50,000 mark in the years to come.
A retracement of 10 to 15 percent is good for further up move making it a healthy move. So, as Smart Investors, if we can find Nifty at 10% lower level of ₹19000 we should consider it as an opportunity to add new positions instead of emptying the portfolios.
People also start to invest in other instuments like gold when market is on decline. Read comparision between Gold and Nifty50.
Nifty's Monthy Return in 2023
| Month | Nifty's Return |
|---|---|
| Jan | -2.45% |
| Feb | -2.03% |
| Mar | 0.32% |
| Apr | 4.06% |
| May | 2.60% |
| Jun | 3.53% |
| Jul | 2.94% |
| Aug | -2.53% |
| Sep | 2.00% |
| Oct | -2.84% |
| Nov | 5.52% |
| Dec | 7.94% |
Nifty's return in 2022
| Month | Nifty's Return |
|---|---|
| Jan | -0.09% |
| Feb | -3.46% |
| Mar | 4.33% |
| Apr | -2.07% |
| May | -3.03% |
| Jun | -4.85% |
| Jul | 8.73% |
| Aug | 3.50% |
| Sep | -3.75% |
| Oct | 5.37% |
| Nov | 4.14% |
| Dec | -3.48% |
Monthy Return for Nifty from Jan- March compared
| Year | January | February | March |
|---|---|---|---|
| 2019 | -0.29% | -0.36% | 7.70% |
| 2020 | -1.70% | -6.36% | -23.25% |
| 2021 | -2.48% | 6.56% | 1.11% |
| 2022 | -0.09% | -3.46% | 4.33% |
| 2023 | -2.45% | -2.03% | 0.32% |
Final words
The historical data and technical analysis suggests Nifty 50 may be due for a correction of around 10% in the coming months. Last month in January, the index returned −0.03%, giving us a hint that the seasonality trend might be at play this year too.
However, rather than panic, investors should view this as a potential opportunity. Things might get totally different too as this year we will also witness elections in India, and such economic events directly affect the stock market.
Market corrections are a normal part of the economic cycle and help wash out excess speculation. For long-term investors, they provide a chance to buy quality stocks at attractive valuations. With India’s economic outlook remaining positive, Nifty is likely to recover and reach new highs in due course.
Therefore, investors should not let the volatility shake their faith in India’s growth story. Stay focused on accumulating fundamentally strong companies for the long run. Maintain adequate cash reserves to deploy on market dips. And remember – patience and discipline are key virtues for equity investing success. Periodic corrections test these qualities, but handling them well can create wealth over time.
Thenks vichar !