For the Indian market, the union budget is a major event where expectations of fortunes in the new financial year are either built or dashed. Amid all the hype and hoopla, the budget triggers either bulls to go on a rampage or bears to hammer down stocks. Investors closely await signals on economic policy from the government to decide whether they should call on the market.

Sometimes very high expectations are built-up leading to a sharp run up in stock prices before the budget. In other cases, markets remain subdued fearing a harsh budget. Nevertheless it is a time when investors take big bets.

For instance, there are a lot of expectations from the forthcoming budget as the markets expec a sequel to the two earlier "dream budgets" presented by the finance minister P Chidambaram.

A study by Dimensional Securities (Demystifying markets: Pre- and post-budget), a leading broking firm based in Mumbai on how stock markets behaved during the periods leading up to the budget in the last 15 years since the economic reforms were initiated, provides interesting insights into market trends.

During seven of the 15 budgets, the study notes, the markets have seen a rally before the budget if one takes the 31 trading days as the beginning of the budget rally. Even if 16 trading days of the budget rally just before the budget day are taken into consideration, the statistics remain more or less the same — eight occasions out of 15 have yielded a positive return, the report says. However, whenever there is a massive pre-budget rally there is invariably a fall after the budget.

Statistics show that except for two of the Manmohan Singh budgets, all the other five occasions when the markets have gone up prior to the budget, have given negative returns post-budget. "It seems that there is an inverse relationship between the pre-budget and post-budget behaviour," says an analyst with the Dimensional Securities.

When the returns are positive in the pre-budget period, the returns are invariably negative in the post-budget period. This clearly supports the hypothesis that there is an irrational exuberance
in expectations from the budget which does not materialise. The expectations are only high from finance ministers with a good track record in delivering the goodies. However, these expectations rarely materialise and disappointment sets in with most of the gains given up in the post-budget period.

However, an investor who buys 31 trading days before the budget and sells after the budget, still benefits, says the report.

Negative returns before the budget reflect the fear that the budget could do a lot of harm. However, these fears are exaggerated and the post-budget returns are positive in such cases. This also supports the hypothesis that when fear weighs on the markets, it always results in panic selling. This should not be seen as a crisis and one should use it as a buying opportunity, prescribes the report. The broad theme that emerges is that one is better off doing the opposite of what the market is doing. If there is a pre-budget rally, then one should sell and buy post-budget. In case, there is panic selling before the budget, one should buy into the panic selling and sell after the budget, the report said.

The movement on budget day does not give any clear indication about the market trend.It seems that the real Christmas time for the stock market is the budget day with the finance minister playing Santa with his bag of gifts. However, it is a completely different matter that on more occasions the investors are not happy with the gifts handed out.

This clearly indicates that once budget expectations are built, the room for disappointment is high.