There are two ways to make money in the stock market

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.

 
This year, however, has been different. There has been a strong pre-Budget rally, giving profitable opportunity to short-term investors. The Sensex is up six per cent in January so far. This opens the possibility of a post-Budget correction if the finance minister’s proposals fall short of expectations by even a small margin, given the historical trend.
 
However, pre-Budget volatility always provides some sure trading opportunities. Railway and fertiliser stocks have always given returns to short-term investors in the past, as bulls bet on them due to budgetary allocations announced for the two sectors almost every Budget. Not surprisingly, railway equipment manufacturers such as Titagarh Wagons and Texmaco Rail top the pre-Budget volatility chart in BSE 500 companies. Likewise, infrastructure developers, engineering and construction companies, especially those related to irrigation and highways, also provide good trading opportunities for short-term investors.
 
Among BSE-100 stocks, Adani Ports have always been among the most volatile, providing trading opportunity to short-term investors.
 
This year the focus has been on stocks related to the rural and affordable housing sectors in the pre-Budget rally. With the imperatives of neutralising the economic impact of demonetisation and impending state elections, the government is likely to adopt populist measures focusing towards the agriculture and rural sector. We expect expenditure to be concentrated on agriculture, food subsidy and the rural employment guarantee scheme.
 
This is likely to provide a leg-up to consumer and rural market-focused firms such as ITC, Hero MotoCorp, Britannia, Coromandel International and  Maruti. Focus on health care could mean some push to players like Cipla, where domestic sales contribute a higher share to revenues.
 
A word of caution for investors. Some experts dismiss the entire notion of Budget trade. At best, the Budget has some impact on the sentiment in the short term but has little or no impact on the fundamentals of a stock. Many short-term traders play the Budget volatility but it’s too risky for individuals, given the potential losses if the call goes wrong.