Dalal Street Smiles

Over the years we have seen that the bonding of the Indian stock market with the rest of the markets in the world, especially the US market, is undeniably strong and lasting. Whatever be the news–good or bad–in the US market will leave an impact on the Indian.

The market was struggling under the selling pressure for more than a month and it is a ridiculous to call it a "correction". Indeed market was looking up for some oxygen to breath. Life Saver was the announcement by the US Federal Reserve on Tuesday (March 18) to cut the interest rate by 75 basis points to bring it down to 2.25 per cent, it gave market a much required push up. And not only Indian but markets across the world began to see some green.

The BSE too reacted positively and after a long slit the Sensex is rising. However in post Uncertainty Rules I have mentioned that the 75 basis point cut that the US Fed would announce had already been discounted and the impact could be minimal.

The fuel to bring back life in the market was not just the US rate cut alone. The good news also came from two largest securities firms: Goldman Sachs and Lehman Brothers. They reported results better than what was expected. (Rather I say lower losses than the estimates.) This was enough to see the US stocks rallying the most in a single day in the last five years.

The better than expected results from Lehman and Goldman were taken very positively after Bear Stearns was almost on the verge of liquidation and JP Morgan Chase decided to buy the shares of Bear Stearns at almost one tenth of its price. Lehman was a close contender.

So is this the end of soreness for Indian investors? I doubt. But it is certain that in the near-term we see cat bouncing a little bit more.

The rate cut is also sending indications that the US Fed is trying its best to sentimentally support the market. Let us see how far it will be successful in the long run.

At present my feelings are that we have got a bit of a bounce in our hands. This is good news for investors and traders but unfortunately due to festival of colors and Eid Indian markets are closed for a long weekend holiday (starting March 20) and will return to trading only on Monday (March 24). So if this global rally remains same or strengthens over the next 2 days, then at least Indian market will not be able to react to it. And in the current scenario when these sort of positive things are expected to volatile, Indian markets can loss significantly in comparison to other markets.

Now, what should investors do at current situation? Strategically speaking, I think, one should sell in this kind of a rally rather than buy. I believe that while long-term investors should either stay away from the markets or buy 'Blue Chips’ in a staggered manner, short-term investors can take advantage of every rise in the market as an opportunity to exit. Because there are certain factors, which are worrying me, if I go ahead.

First, India's higher dependence on the global markets will keep causing pain in a global financial market sell-off;

Second, higher inflation rate is inversely proportion to higher growth rate. Hence yielding earnings risk.

In addition, if Indian market is compared with other emerging markets, it is still up by six per cent since its August 2007 low; whereas several other markets are trading below their earlier lower levels. Therefore, now or then, we will rally with others.

FIIs are still the net sellers in the market for the year (Thanks to new FII and FDI norms), as well as for the last week owing to the hefty selling by BSMA (investing arm of Bear and Stearns).

Most bothering stuff in the market at present is the Investors Confidence than anything else. The market has lost a major trust and it will take a some time to recover.

Only factors that could create some positive impact on the market is good corporate earnings which are looked at as an immediate domestic factor influencing the market. The advance tax payments for the final quarter have shown a good upward rising slope on the curve, indicating that earnings for the January-March period could be strong.

These results may be of some help to the markets in the short-run, but if the growth is not sustained then it will soon lead the curve into negative direction. It is true that the sudden and sharp fall has made valuations of companies more attractive and therefore presents an opportunity for long term investments and capital gains. The P/E ratio of the Sensex has reduced from a high of 28.57x to 19.16x. However, that is not to say that there are no more downside risks in the near-to-medium term. No one knows, yet, if the worst of the US sub-prime crisis is behind us. Many of the analysts still believe that there is more to come.

The uncertainty in the market is expected to stay, and hence it is a cautious strategy for long-term investors either to stay away or buy in a spread over a period of time manner. On the other hand short-term investors should take every climb in the market as an opportunity to exit.