Budget 2022: 10-yr pre & post budget sessions throw interesting trend; Nifty reverses

Since the Narendra Modi-led government came into power in May 2014, the Nifty price movement of 10 trading days before and after the Budget shows quite an interesting trend. Every year since 2015, if the Nifty showed a downward trend before the Budget in the previous ten trading sessions, there was a positive surge afterwards, and vice-versa.

In 2015, in 10 pre-Budget trading sessions, the market was 1.09% positive, but it slid to negative 3.02% post-budget in the next 10 trading sessions. In 2016, there was an upward swing from negative 2.46% to positive 6.78%. The year 2017 was a tiny exception to the trend when the market was up by 3.79% before the budget and it moved up by 0.10% after the budget.

If the market movement is any indicator of the market’s reaction to the budget, the years 2015, 2017, 2018 and 2019 budgets proved to be relatively disappointing. In each of these years the market rose, in high expectations before the budget, and dropped afterwards to convey its dissatisfaction. Only three out of the last seven budgets were welcomed by a positive surge in the market, and those upswings have been quite bold in the past two years (in 2020 and 2021) when the market swung by almost 8% from negative to positive.

If the historical trends are any indicator for what is to come, the currently down sliding index may just swing in the opposite direction post this Budget. In last nine trading sessions, Nifty nosedived 6.5%. On January 17, Nifty closed at 18,308.1, while on January 28, Nifty closing price was 17,101.95, registering a 6.5% fall.

Traders’ dilemma

To counter the impact of negative surprises, institutional investors and many retail traders hedge their cash positions by taking a derivative exposure. In anticipation of a market fall, investors and traders either buy put option or short the Nifty futures. But shorting futures need huge margin money, so most of the retail participants buy put options. Value of put option rises when the market falls.

Implied volatility (IV) that forecast likely movement of a security or index price is a key input in option pricing formula. In pre-Budget sessions, the value of IV rises rapidly, making options costlier. Traders’ are always in flux as IV value collapses once Budget is presented, making option buying a costly affair. A day before the Budget last year, Nifty IV was 31.56 but on budget day it collapsed 29% and ended at 24.5.

Wild swings pre and post Budget sessions have brought cheers and tears to traders. Past patterns and trends help them in making wise trade decisions. This year ahead of the Budget, Nifty has drifted downwards. Following past trends, it may move up post-Budget. However, whether 2022 proves an exception to this trend or not will depend on the announcements on February 1 that the entire nation eagerly awaits.