The stock markets are full of surprises. The unabated bull run on the bourses over the last five years may have made investors forget about the downside and rude shocks markets usually have in store following a sustained bull run. The kind of movement markets have witnessed in the last two days cannot be termed normal or regular. However, it is worth mentioning one of the golden rules of the stock markets: The market is always right.
What may go wrong is our perception and analysis.
Happenings on the bourses in the last two days can be best described as mayhem or bloodbath, but no matter how we look at it, the markets have shown investors and analysts that the unexpected should always be expected. No one could have even imagined the markets would behave as they have done over Monday and Tuesday, simply because this cannot be explained by fundamentals or technicals.
Still, a combination of domestic and global factors managed to create a vicious circle, which made key indices tank and stock prices plunge. In part, this was because of the liquidity crunch on domestic bourses due to the heavy oversubscription to the Reliance Power Ltd’s initial public offering (IPO), which concluded last week. This was also partly because of renewed concerns over recessionary pressures in the US.
The sell-off that resulted eventually triggered margin calls, and that did the rest of the damage. After this, it was no longer a market phenomenon, but one related to investor psychology. As per a legendary investor, in a falling market, here’s how the mind of the investor works: first, there is a denial, then there is a measure, and then there is an urge to purge. This is what has happened this time, too.
Investors brushed aside Friday’s fall on the grounds of the fundamental strength of the Indian economy and good corporate results. As the market opened on Monday and started falling, investors started measuring the depth of the fall. They assumed that the market had a strong support at 5,200 points (Nifty). But as the market fell below 5,200, there was an urge to purge—you can call this the one thing that triggered all those margin calls. Investors who survived this pressure were forced to pare their positions fearing a further fall on the bourses.
There are definitely other ways in which the market’s fall can be explained. At the core, however, it is a fine exhibition of how investors behave under pressure. I do not intend to say this was the root cause of the fall as it is amply clear that what triggered the fall on the bourses was a combination of global and domestic factors, but investor behaviour did definitely aggravate the fall.
The Indian economy and its fundamentals remain as strong as ever. The stock market is the mirror of the economy, but short-term movements such as what we have seen over the past two days do not represent the changes in economic fundamentals. For prudent investors, this is an opportunity to pick bargains.
Some people claim that this is the beginning of a bear market. Well, the beginning of a bear market reflects a marked shift in trend, both in stock markets and in investment patterns. Two days of data is not enough to depict a trend and sometime ahead this will become just a blip unless the markets fall consistently and investment patterns suggest a shift of interest into other investment options, such as fixed income bearing securities, bonds, etc.
Since record tax collections, falling interest rates, high industrial growth rates and bumper corporate profits are indicators of a booming economy, a fall in the stock market alone does not suggest the beginning of bear markets. Chartists, who dig out charts for such events, often commit the mistake of relying too heavily on few technical indicators—this may give misleading results. Moreover, cues from the global economy and stock markets could also be misleading at times. Let us make no mistake: European and US economies have their own strengths, weakness, opportunities and threats, which may not be the same as others. If the US were to go into a recession, then there may be a negative impact on the Indian economy, but we will not perish. Calling it the beginning of a bear market at this point of time would be too premature.
Now for the big question: What lies ahead?
It is an easy call now. Good opportunities are all around and it is time to start picking up the bargains. However, the impending global crisis should not be underestimated—go ahead, but go slow and with caution. As far as the immediate trend of the market is concerned, purely technically it appears that the market has seen its worst now. That does not rule out the possibility of further fall, but it may not be as harsh and sharp.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org