>Higher the rise, harder the fall (ICICI SECURITIES)

Based on the performance of BSE-100 stocks in the past five rallies and subsequent significant corrections (since May 1999), we conclude that a considerable proportion of stocks that lead a rally decline the most in the subsequent correction. However, the laggards of the rally are less likely to be the best performers in the subsequent correction. Since March ’09, the Sensex has doubled; in the past two months, it has become increasingly difficult to justify the rally on fundamentals and valuations. For the rally to continue or even the markets to sustain at current levels, we believe that Q2FY10 results need to be considerably higher than expectations and FY10/FY11 earnings revisions significantly positive. This report assumes relevance if this does not happen.

■ Conclusions. On an average, 46% of the rally leaders are the top underperformers in the subsequent correction. In two of the five time-periods considered, 60% of the leaders have given up their gains the most in the correction. The conclusion is less compelling for the laggards of a rally. On an average, less than one in three laggards feature among the top performers during the correction phase and in two of the five time-periods, the number was less than one in four.

■ Methodology. We have considered five time-periods since 1999, when the Sensex rallied at least 50% and subsequently corrected at least 15%. We have taken the BSE-100 constituents (at that particular time period) as our universe and define the top-25 performing stocks among them as ‘leaders’ and the worst 25 performers as ‘laggards’.

Top-25 leaders and laggards in the recent market rally
Current Bull Run from March 12, ’09 to October 15, ’09

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