Lucky leap year? Why Sensex could hit 25,000 in 2012

Leap years have more to offer investors than one extra day of trading. The history of Indian stock markets shows that ever since the BSE Sensex was launched, the benchmark index has always soared to a new high in every leap year. The previous high hit by the Sensex of 21,206 was in 2008, another leap year.

Of course, it’s not as if one extra day of trading is capable of taking markets to a new high.

There is a logical reason for this cyclicalbehaviorin the markets: it’s called The Presidential Cycle. While a number of time cycles operate in the markets, the best among them is the four-year Presidential Cycle, which affects not just stocks, but also real estate, bonds and commodities.

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Explaining the Presidential Cycle, Investopedia says that economic sacrifices are generally made during the first two years of a president’s mandate. As the elections draw nearer, administrations stimulate the economy by creating jobs and a feeling of economic well-being.

The Stock Trader’s Almanacsays that ‘The makingof Presidents is accomplished through an unsubtle manipulation of the economy. Stimulative fiscal measures designed to increase per capita disposable income, providing a sense of well-being to the voting public which increases the federal budget deficits, government spending and social security benefits, interest rate reductions on government loans and speed-ups of projected funding.’" Indeed, current events in the US are unfolding exactly as per this script.

Quantitative easing and artificially managed low interest rates are creating excess liquidity, which is finding its way into equity, bonds and commodity markets across the globe. Real estate markets, however, have not yetbenefitedfrom thislargesse.

Billionaire investor George Soros points out how one can take advantage of the cycle when he says “Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognise the trend whose premise is false, ride that trend and step off before it is discredited.’”

We have seen the impact of liquidity pumping the markets higher. Foreign portfolio investors invested around $2.13 billion in equities, which pushed the market up by 11 percent.

Looks like this leap year will also live up to the reputation of its predecessors. So, is the Sensex likely to hit 25,000 this year??