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Volitility expected, stay in cash

Sunday, July 29, 2007

Friday's frenzy saw the Sensex correcting itself by over 500 points. Is the gold rush over for stock market investors? The Indian investor has seldom had it this good. The prolonged bull rally, which has gone on for over four years, has ensured that the value of their investments have risen by over 40 per cent every year.

Sample these for numbers: The Sensex was at 10,040 points on June 21, 2006 and it rose to 15,776 on July 26, 2007. That is, within 277 trading days, the Sensex gained over 5,500 points. In other words, Rs 10,000 invested in a index fund last June would be Rs 15,000 today.

Says Arun Kejriwal, investment consultant, "The markets have been technically overbought for a while now and were waiting for a trigger to correct." Adds Shankar Sharma, managing director, First Global, "During the last four years, the bull run was fuelled by cheap credit and huge risk-taking in markets all over the world."

He believes that this dip was overdue. And the trigger came when the Dow Jones Industrial index fell on Thursday by 312 points. The Sensex followed on Friday with a 541 point dip.

There's a clear signal that the Indian markets are bonding strongly with the world markets. If one considers data from January 2005, one can see a clear correlation of .92 between the Dow and Sensex on a daily basis. As the graph clearly indicates, a small dip/rise in the Dow leads to a similar movement in the Sensex but at a much larger scale.

Like in the heady bull market of 1999 and 2000, when the previous day's Nasdaq closing indicated the trend that tech stocks would take the next day in India, this time the Dow is providing direction. So, it is prudent for equity investors to have a look at global markets as well.

But the million dollar question is where is the market headed? The consensus is that another round of selling is just around the corner. Says Kejriwal, "I expect the market to correct by around 2,000 points (13-14 per cent) over one month. But it will be interspersed with small rallies."

Sharma fears worse and believes that it will be a 25 per cent correction. The argument here is that there is no particular reason for the rally to have gone on for so long. Corporate results that have come out till now, have been subdued, interest rates are at peak levels and oil prices continue to go up (over $76 a barrel).

So what should you be doing as an investor? Kejriwal says that if you did not book profit then there is no need to panic and go on a selling spree. On the other hand, if you are sitting on idle cash and waiting for an opportunity, the advice is to simply keep sitting on it for some more time.

"There is no need to enter the market tomorrow or even the day after. Wait for ten days before you take a call," he adds. The reasoning here is that it does not take long for the market to move from being overbought to oversold. And when the market falls by another 500-plus points, you will get opportunities to invest.

Sharma feels that investing in debt is a good option during these times because it is expected to perform well over the next three months.

Agrees financial planner Govind Pathak, "Investors could diversify into short term liquid instruments now but only for a period of three months." For the risk-averse, he recommends Nabard bonds which have a 10-year lock-in period but are offering yields of 8.7 per cent to 9.2 per cent.

As far as stocks go, Pathak says one should have a minimum horizon of three years as one can profit from the cycles that occur in the market. Also, one should keep a target price of a stock in mind.

Once the scrip is available below that price, one should start purchasing without even looking at the market.

Also, if you have earmarked Rs 10,000 as your investible funds per month, then you should keep on investing that amount in stocks you like. Regular buying, therefore helps. In fact one could even get more aggressive if the market falls fast. "Do not look at the market, just look at your stocks," he advises.

The writing is clear, expect some more bloodbath in the bourses like it was in May-June 2006. As the selling pressure increases, there could be good news for value investors. Scrips, that were expensive will now dip sharply and become cheaper for potential investors.

As Kejriwal puts it, "The market, at present, only has traders and not many investors." Therefore, some correction will definitely make it more attractive for potential investors.

Posted by FR at 11:28 PM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.