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Where is Sensex headed?

Mahesh Nayak     March 18, 2008

Up or down? Itís a tussle between the bulls and bears on the BSE
Tussle between the bulls and bears
The recent gyrations of the BSE sensex will make a yoyo look like a model of stability. On average, the swings between the day’s highs and lows have increased to 3.24 per cent, compared to 1.8 per cent in 2007. Says Gurunath Mudlapur, CIO, Atherstone Capital Markets: “It’s no more a tussle between the bull and bear. There’s fear in the minds of investors; this is prompting them to square their positions at every rise, thus, causing volatility in the market.”

This is due to the uncertainty prevailing in the global market, especially on account of the recession in the US, rising oil prices and depreciating dollar. But the most important factors now are the initial signs of a slowdown in the Indian economy and the Reserve Bank of India’s sustained efforts at tightening the liquidity position.

The benchmark BSE Sensex has already lost 25 per cent from its January 10 peak of 21,206.77 in less than three months. The fall was accompanied by huge selling by FIIs. Since the beginning of the year, FIIs have sold equities worth over $3 billion (Rs 13,065 crore). Result: till March 14, 2008, the Sensex had lost 4,526.47 points from 20,286.99 on December 31, 2007. The numbers speak for themselves. From the peak of the market, more than half (1,348 stocks) of 2,652 (the number of stocks have lost more than 40 per cent. The fall has also reduced volumes in the market—the combined total turnover of BSE and NSE in the cash market has crashed from a daily average of Rs 27,511.56 crore in January 2008 to Rs 19,701 crore in March. “The lack of interest is due to the fact that buying is not resulting in a rise in share prices, thus, bringing down volumes,” says Gagan Banga, Executive Director, Indiabulls Financial Services.

In such a scenario, the obvious question is: where is the market headed? Says Mudlapur: “The market is giving mixed signals. The bearish sentiment indicates that the market can go further down, while the attractive valuations point to a rise. I think another 1,000-point fall to 14,000 levels will make the market very attractive for buying.” Adds Banga: “The pain is not over yet. We are in an interim bear market. I don’t think the market will see any major upswing till oil prices cool off and the dollar stabilises, since global cues, rather than domestic ones, are driving sentiment.”

 Crude oil recently touched an all-time high of $110 (Rs 4,400) per barrel; this is expected to impact the performance of India Inc., which is already witnessing a slowdown. In January, the Index of Industrial Production recorded an unexpectedly weak growth of 5.3 per cent. Corporate performance has been one of the key drivers of the rising Sensex. So, if corporate India disappoints, it will dampen sentiment further.

“We will be in a position to judge where the market is heading by mid-April. By then, we will have a better idea about the severity of the US recession and also get to see the performance of India Inc. Things should be fine if the corporate sector manages to deliver a profit growth of 15-20 per cent,” says Banga.

Adds Nilesh Shah, CEO, Envision Capital: “There’s still uncertainty on all these fronts and the market doesn’t like this. The trend will reverse only if three things—fundamentals, liquidity and sentiments— fall into place. But the market will remain weak so long as commodity prices remain high and the situation in the US remains uncertain.” Given this scenario, investors will be better of erring on the side of caution.

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