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Market correction may not be substantial

This article was posted on Sep 6, 2009 and is filed under Market Outlook

It’s almost becoming a trend. Ashwini Sharma, a management graduate working with a broking firm, booked profit as he expects the markets to fall. His friend Gunjan Khare also booked profit partially. The reason for selling their stake was the same. They are afraid about the fast recovery of the stock market. Also, they don’t see any major trigger for the market to move up.

And they’re definitely not the only ones; most industry experts with a few exceptions are expecting a fall, specially in view of the super fast recovery of the markets. And there are several reasons ranging from domestic to global, for a correction to take place, they feel.

First, the bad monsoon. During the last few months FMCG stocks appreciated on the expectation that the bad monsoon will push the prices of their products up, which will increase their profitability.

However, a sustained low rainfall can also increase their input cost. According to a broker, agriculture related companies might have gained on the products, which have already been produced. But their input cost is likely to go up on low production of agri commodities.

In fact, many companies have already started feeling the pinch because of bad monsoons. In the last six months, FMCG companies have been notching up decent growth but in July 2009 their growth has come down to around 13% from high double-digit levels.

However, the actual impact of poor monsoon will only be visible after a lag of a few months. Says, a report of Angel Broking, “The emerging drought situation carries a downside risk to our estimates, both in volumes and in pricing, as rural consumption takes a hit, albeit with a lag effect of three to six months.”

Most blame the sharp recovery for the expected correction. According to an equity broker, the Nifty has recovered around 90% from year lows while other Asian indices such as the Hang Seng have risen more than 60% from their lows. The Dow, too, has recovered around 50% from its March lows. However, this rise seems to be happening too fast.

Therefore, Nifty may start consolidating in the range of 4,300 on the downside and 4,900 on the upside with a negative bias, which means probability to come down is higher.

According to Saurav Arora, senior VP at Jaypee Capital Services, the Nifty has very strong resistance at 4,730-4,750 levels. “I think we have already seen the highs for the year and if we can hold 4,000 levels that would be good. At current levels, valuations look a bit stretched,” Arora said.

According to Arora, a study of Dow’s performance over the last 50 years shows that if the index in the end of August is more than what is in January, June and early days of August, it signals an imminent fall in the following month.

Of the 17 times such condition arisen, 14 times the index showed an average decline of 1.73% in September. The only positive Septembers under this scenario were in 1963, 1983, and 2006. The Indian markets are in a similar situation.

Mr Arora believes that historically September and October have not been the best months for the equity markets. The Lehman collapse also happened in September. In the 10 years through 2008, the Dow fell during seven Septembers. Most of the times it is seen that either the markets fall more or gain less than other months.

Chinese markets have also caught the eye of investors. Andrew Holland, CEO of Ambit Capital, says, “I expect the market to fall for some time not just in India but globally. China is the major concern.”

According to Vineeta Jain, head research & index management at Eastwind Capital Advisors, in the near term China is bit of a overhang for the Indian equity markets. Beijing is selectively tightening lending, with new loans falling to near Chinese Yuan 300 billion for August, from levels well over yuan1 trillion per month earlier in the year. And the Shanghai Composite Index has fallen by over 20% in the month of August. With any substantial fall in the Chinese stock market, the Sensex may touch its lower level of around 13,000.

In the last six months, the market rallied due to several triggers. First and foremost was the election. On the very first trading day after the election result, the Sensex gained as much as 17% from its previous closing price.

In fact, according R K Gupta, managing director, Taurus AMC, the duration between the start of election process and formation of the new government was in itself a trigger. Everyone knew that during this period no change in economic policy was going to take place. So many investors and fund managers encashed it.

Market got the next trigger from the 100 days plan of the new government and again, markets appreciated sharply.
However, experts do not see any major trigger for the market to go up in the near future and hence it may see a bit of correction. However, the quantum of decline may not be substantial.

According to Mr Gupta, the equity markets are due for correction. Now the market will move in a narrow range of around 4,400 to 4750 in terms of movement of the Nifty. Investors have to be very cautious. For any reason if it breaches 4,700 then a profit booking cannot be ruled out. At the same time if it goes below 4,400, the recovery will be fast. Also, since the advance tax is to be filed on September 15, the markets may witness profit booking from September 9 onwards for a few days.

So what’s there to watch out for! The whole industry is currently waiting for the next quarterly results. In addition to this, in the next 6 to 12 months, the government’s commitment on bringing capital flows and pursuing the reforms process will be the key drivers for the equity market. The amount of advance tax collection will show a clear picture of expectation of profit growth by companies.

According to Amitabh Chakraborty, president (equity) at Religare Capital Markets, apart from quarterly results investors should look at sowing of Rabi crop and commodity price movement.

Also, as an exception, Mr Chakraborty is bullish in the next 1-2 months, as the market would rally on the back of good global cues. “I would be contrarian on this occasion and go long on the market as I expect the coming quarterly results to surprise the market on the positive side, like it did in the first quarter,” he said.

While experts are still giving their logic for a ‘V’ or ‘W’ shape recovery for the market, according to a joint analysis of SundayET and Eastwind Capital Advisors, the Sensex has already made one ‘W’ shape with two bottoms around 8,000 in October 2008 and early March 2009 and intermediate high of 10469 in early January 2009.

Also, until recently it has been considered that the current rally is a bear rally. On the contrary our research shows that during the several bull rallies in past, mid cap stocks outperforms the large cap ones, which is the case in the current rally. Since end of February large cap stocks advanced by 75% while the mid cap went up by 92.2%.

While correction is a general phenomena of the market, investors worry about any substantial correction. In the past whenever the equity market has made a top, advance/decline ratio has been less than one. Market top is defined as the level from where market falls by more than 30%.

However, for July 2009 or August 2009, the advance/decline ratios are 1.11 and 1.06, signifying that there may not be a substantial correction. The advance/decline ratios is calculated by dividing the number of stocks that went up by number of stocks declined.
EXPERT TALK

The equity markets are due for correction. Now the market will move in narrow range of around 4,400 to 4,750 in terms of movement of the Nifty. Investors have to be very cautious .- R K GUPTA MANAGING DIRECTOR TAURUS AMC

The sharp rise in the equity market is likely to tempt investors for profit booking in near term, however, one should not see it as a reversal of the trend . – SANJAY SINHA CEO OF DBS CHOLAMANDALAM ASSET MANAGEMENT

I expect the market to fall for some time not just in India but globally. China is the major concern . – ANDREW HOLLAND CEO OF AMBIT CAPITAL

Apart from quarterly results, sowing of Rabi crop and commodity price movement will give right cue to investors . – AMITABH CHAKRABORTY PRESIDENT (EQUITY) RELIGARE CAPITAL MARKETS

source: Economictimes

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