Curb your excitement. This rally is for momentum chasers
All these months, I had two medium-term scenarios in mind. One, after a 2,500 points rally in the Sensex over three months from the end of May, I felt we are about to give up some of the gains. A smaller possibility, which I have mentioned for several fortnights now, was that since institutional investors are ready to buy the dips and markets are trending up in the rest of the world, especially the troubled US market, the Sensex may go up further—all the way to 19,000 which would be followed by a violent downward move.
In leaning towards the first possibility, I was wrong about the market direction this time. The low-probability scenario has actually played out, even though fundamental and technical evidence were expected to weigh heavily on the market. For the record, corporate growth is slowing down; speculative positions in the market are huge; volatility has been low; and the recent move has been unusually long—stretched from late May to early September.
As I had said, it was a long rally and unusual at this stage of a bull market. We have had three months of rally without any meaningful correction, preceded by 15 months of rise. The market usually goes through a violent and substantial correction towards the end of such a long and continuous rally. We had said that “While there is every possibility of the market running away, thanks to the force of liquidity from foreign investors, there is no need to get tempted, certainly not by the large-cap, blue-chip stocks that are not cheap.”
Instead, what we got was a resounding upmove. At the time of writing, the Sensex is at 19,600. A 1,400-point move has come from nowhere, in just eight days of continuous rally. Does this change anything? We are in the camp that takes price signals seriously. While we don’t see fundamentals improving dramatically, and we don’t see how the Indian market can remain divorced from the slow growth in the rest of the world, we also recognise that an overvalued market can get even more overvalued. Haven’t we seen it in 2000, 2006 and again in 2008? As usual, foreign institutional investors cannot get enough of Indian stocks to buy. They have been pumping in thousands of crores of fresh money into India with the same anxiety as that of a passenger lunging at a train leaving the station.
There are two ways to play the situation. One, now that virtually everyone has turned bullish, there will be sharp rallies in highly volatile mid-cap stocks. They will yield quick gains if you can buy them before they make a big move, backed by a concocted story. As you can guess, we don’t advocate this. It is best played by hardcore professionals who have seen many such euphoric cycles and know very well how these end. The second strategy is to stay calm and wait for a sharp drop in prices and step in and buy stocks that are still cheap and growing. There are many such stocks. Since these are not what institutional investors buy, they are still available at reasonable valuations. Keep reading our Street Beat section and Cover Stories from time to time.(Feedback at[email protected]) —Debashis Basu
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