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Markets rise, but not out of the woods yet

Markets rise, but not out of the woods yet
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First Published: Wed, Mar 26 2008. 12 48 AM IST

Updated: Wed, Mar 26 2008. 12 48 AM IST
Mumbai: The benchmark index of the Bombay Stock Exchange, Sensex, gained at least 6% on Tuesday, and has risen around 9.5% in the last four trading sessions, but no one is certain whether this marks the beginning of a bull run.
On Tuesday, the Sensex added 928 points, its second highest absolute gain ever in a single day, to close at 16,217.49, even as global markets rallied on improved sentiments in the US equity markets, after JP Morgan Chase and Co. increased its bid for Bear Stearns Companies Inc. shares from $2 to $10, and on the back of a surprise 2.9% spurt in the February home sales in the US.
At the National Stock Exchange, the broader 50-stock Nifty index gained 5.8% to close at 4,877.50.
Over the past four trading sessions, the Sensex has partially reversed a 10-week trend of losses.
Most analysts say a longer consolidation period is required to form a proper base for the next bull run. “We are witnessing a relief rally, after being in oversold territory,” said Deepak Lalwani, India specialist and a director at London-based brokerage Astaire and Partners Ltd. “Markets have found an interim bottom,” added Satish Ramanathan, who helps manage $3 billion worth Indian stocks as head of equities at Sundaram BNP Paribas Asset Management Co. Ltd. “Improved confidence on banking stocks helped this relief rally,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership LLP (DSP), a global hedge fund.
The financial services sector led the rally across Asia and Europe on Tuesday as funds accumulated stocks of banks and finance companies.
The recent gains of the Sensex have come after the US Federal Reserve cut its policy rate by 75 basis points to 2.25% on 18 March. One basis point is one-hundredth of a percentage point. The benchmark index had lost 951 points on 17 March after the collapse of investment bank Bear Stearns. Despite these gains, the Sensex has lost at least 20% this year.
Still, the current rally has helped recover Rs2.27 trillion of the Rs19.7 trillion in wealth (as measured by notional losses in market capitalization) Indian investors have lost thus far this year.
According to provisional data provided by the Bombay Stock Exchange, foreign institutional investors (FIIs) bought $310 million (Rs1,246 crore) worth of stocks net of sales in the cash market on Tuesday. Since the beginning of 2008, FIIs have sold Indian equities worth $2.9 billion, net of purchases. In 2007, they bought a record $17.36 billion of equities net of sales.
The renewed buying interest from the foreign funds and short covering were behind Tuesday’s rise of the index, said analysts. Short covering is a phenomenon where traders buy equities to close an open short position. This is usually done when they believe that the market will rise. The traders make money by closing or covering the short position by buying the stock in question at a price below its original selling price. A short or short position is simply the sale of a borrowed security in the hope that it will fall in value (the trader can then buy it back at a lower price and return it, making a profit).
Bhat of DSP said the coming earnings season could boost market sentiment because “it looks like more than 20% (growth in) earnings is on” (for this fiscal). Global ratings agency Standard and Poor’s latest report on the region, also predicts good weather for corporates across Asia. Indian firms will start announcing annual results for 2007-08 from the second week of April.
Some analysts expect the market to slide again when derivative contracts for March expire on Thursday.
“Current trend indicates that the market could go down around the settlement,” said Gurudatta Dhanokar, derivatives analyst at Mumbai-based Almondz Securities Ltd.
In a note to clients on Tuesday, two other Mumbai-based brokerages—India Infoline and closely-held Asit C Mehta Investment Intermediates Ltd—also predicted pressure on indices at current levels and volatility in the next few sessions.
However, US markets bucked the trend across Asia. At 8.30pm India time the Dow Jones Industrial Average was trading at 12,492.63, down 56.01 points or 0.45%. On Monday, the DJIA had gained 1.52%.
Among the sectoral indices, the representative baskets of realtors and banks gained the most. These were the worst hit sectors during the meltdown.
Ashwin Ramarathinam contributed to this story.
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First Published: Wed, Mar 26 2008. 12 48 AM IST