Budget 2017: Here's how to make the most of market volatility

Typically, markets correct before the Budget and rally afterwards, but it can be different this time

There are two ways to make money in the stock market. Either one rides the growth wave, buy and hold stocks that offer rising earnings and stock prices or play the market volatility — buy a stock when it is rising and sell if it’s falling. The latter, also called momentum trading, can be profitable during periods of heavy news flow, such as before or after the Union Budget.

The run-up to the Budget is full of market-moving news about various sectors and companies, which translates into volatility, providing ample trading opportunities. After the Budget, the focus is on unpacking the financial impact of the finance minister’s proposals on key sectors and companies. Though the market tends to price in the impact of measures on the Budget day itself, traders can still make money by exploiting the gap between the market’s immediate reaction and the long-term impact of the Budget measures.

Historical data suggests that more often than not, the broader market corrects in the run-up to the Budget. For example, the Sensex fell by an average of 4.4 per cent during the 30-day period prior to the Budget. The pre-Budget trade has been a one-way bet, with the index correcting on all past 10 occasions (see table).

Post-Budget, the market has often moved in the opposite direction. On average, the Sensex has given 2.9 per cent return during the 30 days after the Budget. Experts attribute this to the mis-match between market expectations and the actual measures announced. “A market correction before the Budget signals investors’ low expectations. Given this, even if the Budget has a few good measures, which is most often the case, it fuels a relief rally,” says Ambareesh Baliga, an independent market expert. Read more