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Friday, July 11, 2008

Reason for the indian stock markets fall and future market outlook


In last 4-5 years or so, Indian Stock Markets had been zooming up non-stop, crossing one milestone after another. This rise had defied law of gravity and law of average. Better economic conditions, higher GDP and greater liquidity from retail investors as well as FII were main drivers.However, during this period, good news was being given extra premium and negatives were being brushed under the carpet. Irrational exuberance and excessive greed through rationality and caution to the wind.Under such circumstances, a healthy correction was expected. However, never-before crash (rather a vertical fall) took everyone's breath away. Yes, global markets also turned weak but in the past,Indian markets rose even when global markets were dull. Well i feel that there is more than what meets the eye.Repeated and aggressive media exposure to select FIIs and technical analysts appear to be the major cause for this state-of-affairs.Corporate earnings have not nosedived.Fundamentals of Indian Economy continued to be as strong (or as weak) as it was in April 2006. However, markets tanked as if Indian Economy was in the grip of 1929 type depression.

1)Finding a small ray of hope, Bears jumped into the fray who knew mentality of Indian investors that in general, investors are not so rational and act blindly upon whatever they hear or see:Came one of the respected gentleman of first flobal who said that sensex should be 10000.With due and full regards to his experience, talent and knowledge, does such a statement make any sense? 10000....???It should be prudent to note that the same gentleman just some months back sounded as bullish as one can get.Investors, Research Analysts, Brokers stopped applying their own mind, stopped looking at fundamentals and valuations of the scrips and started singing same tune as Marc faber and the above mentioned gentleman.

2)Technical Analysts also were very successful in pulling down psyche of the investors.Strangely, when market is going up, most technical analysts predict further new highs (without any time frame). Similarly, when market is going down, most technical analysts predict further new lows (again without any time frame).I have always felt the contrary and believes in rationality and law of average.

3)Normally, investors retain some liquidity.However, buoyed by the mind boggling returns, all were fully invested without any liquidity.Listening arun"s words to have some liquid cash or the "nightmare that i witnessed" last night were extravagant jokes at that time.Now the consequences is there for you,remember the pangs of haunting memories"..anyway try to learn from your experiences,it would always comes superior to precipt.So When markets crashed, F&O margin money calls came but no money.It accentuated the market fall as shares had to be sold like flood to meet margin money obligations.

4) It led to lower valuations of LAS Accounts with banks and banks were forced to sell LAS shares of their clients to keep adequate margin.

5)Many investors,in order to meet their obligations to the broker, resorted to redemption from mutual funds and i beleive more sort of stuffs can be there in the offing.

6)All this has led to a situation where investors, brokers are selling their shares as if they are aboard a sinking ship. Everyone is feeling that today is better than tomorrow and presumed that this slide will not stop. As if there may not be a light at the end of the tunnel. Its clearly proving that behaviour of investors swings wildly between bouts of irrational exuberance and irrational depression.

7)More shocking that these most respected Gurus and Institutions in one swipe rated Indian Equities as overpriced. How it can be? There may be overpriced counters which have P.E. Ratio of 20, 30 or more. But they did not bother to give devil its due which means that they should have atleast pointed out that there are still some scrips worth buying whose P.E. Ratio is less than 10 or 8 or 5 and who are going to report better results.

8)There is a saying that "Tongue hardly weighs anything but still so few people can hold it".This aptly applies to a stock tipster whose stock tips are published everyday in Business Standard. Some Examples:

Bulls go for vacation for 3-4 months.
Bears will kill the market.
Sell even now.

Same Analyst,until few days ago, was screeching from the rooftop, howling at the investors to buy so many new stocks everyday with words like "Will be 20% freeze for 3 days, 10% freeze for 5 days" etc.etc.

Conclusion:I can go on and on but will that have any effect?Or the same thing would get repeated?You people would sell at these levels only to cover the same companies at a much higher rate,rite?Well i have put few lines now its upto you people to make things on your own.Rationality may not be in vogue now but it would be someday...........(not assured but guranteed)



Regards,
ARUN
I can be reached at:arunanalyst@rediffmail.com

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