13% Fall in 13 weeks... Is this time to be bold now?

" Be fearful when others are greedy and Be greedy when others are fearful "
But Mr.Buffett never told us how to identify the concensus greed or concensus fear !

Still, it is most common-sensical and effective maxim of investing. Something similar is happening in the current markets. Liquidity is drying fast. People are sharing a consensus view that markets are going to fall from this level like they fell in 2008. Most brokers feel that markets will come down to 17,000 index level. And inflation + FII exits are playing on most of their minds.

Most FIIs and MFs have already sold off major chunk of their portfolios. On the other end, the regular buyers - Insurance seem to be slow in buying due to the lower business they have garnered this year. But they dont have any option. Whatever incremental money they receive, they have to put a significant portion of that in Equities. So, Feb & March should be good months which can show us higher equity levels.

If you look at a very short term, a much awaited short covering rally is in making now. This would be fierce, aggressive and forceful. We have seen a capitulation levels on Friday (28th January) where even the strongest of the minds have given up on the markets and would have booked losses. Entire set up is such where now there are more and more people willing to sell at whichever levels markets could rise.

That means, the bargain buys are available to those who have cash on their books.

I anticipate that the current capitulation levels have created the foundation for a quick 7-8% rally in the market. From the November top of 6338, the markets are down by 13% and 13 weeks got over. Mostly the near term bottom has been made. Even if the bottom of 5459 gets violated during next week, it will only be the opportunity to buy rather than sell, because the bottom will be followed with a strong pull back up.

I remain bullish for next 3-5 weeks and expect that we make a gain of around 7-8%, before starting a new lag of fall.
So yes, it is time to be greedy. But the greed should be well managed as, the current levels are not anywhere closer to bear market. Current market is such that it will give a short term opportunity on long side and long term opportunity on short side! 

Does this remind you 2008 ?

If you have invested sizable sum post Diwali of 2010, you must be wondering if this is going to be repeat of 2008 ?

Worried? You Should be. But not as much as you were worried in 2008...

Well, there are many factors which resembles 2008. Crude is heading to cross $100; Commodities are full of vigor; Both this pushing up the Inflation; Real Estate is showing a lull for last 3 months... Interest Rates are going up... Recent IIP of 2.70% has put a scare...and all that.

True, but we have still not reached the economy of Excessives. In 2008, the biggest challenge to the world was a "deleveraging process". The overleveraged balance sheets of US Banks were in a slow process of deleveraging which pulled out money from many emerging markets. Additionally, there was a much more impactful fear of Sovereign Debt Crisis. These are the troubles of the sizes which can gulp economies together. And in 2011, we are not even closer to that.

Yes, for India, this may turn out to be a challenging year (or say first half) but for a longer term, it is much more promising then what we have seen during last 2 years.

If we focus of the near future, yes, it does look dismal. What are the odds against the market?

1. Food Inflation becoming a political agenda - can that shake and pull down the current govt? It may not alone, but with the wake of scams coming out from 2G scam and many others in making, has a potential to destabilze the govt. and hence the markets...

2. Insurance Flows during last quarter:
Every year Insurance buys substantial amount of equities during last quarter as the money coming in last quarter (due to tax benefits and the year end) is the highest. However, this money always came in through ULIP route, which has gone down post changes in the IRDA rules in September 2010. The ULIP sale has gone half during Q3 and if that continues in Q4, at least 16,000 Crores of potential equity investments would be halted, simply because the money has not been garnered.

3. International Worries:
North Korea Tensions and Sovereign Debt Crisis of PIGGS countries continue to put pressure on the upsides of Internatonal Markets. Additionally, the US Markets are not showing any signs of exhaustion. They are slowly going up in a narrow range. This indicates a much lower volatility, which has never sustained. So, we should see some unanticipated developments coming out from US which will again spoil the game.

4. Inflation Vs  Growth Concerns - what is important on RBI's agenda? Next RBI action on 24th January will make it clear. But looks like that Inflationary concerns are on RBI's top of the mind concern and hence rate hike is imminent. This will not give markets additional shock, as this has already been factored into. On the contrary, this will help market to stabilize.

Here is the explanation how: Currently, the markets are falling not because of anything wrong in the fundamentals. Markets are falling because of the Foreign ETF redemptions and due to heavy selling of FIIs during last 2 months. This can get accentuated if the rupee continues to fall, as this will trigger other FIIs also to sell to protect their Dollar Gains. But if the RBI raises the rates, it will allow rupee to appreciate, or least to protect the downside of Indian Rupee. This means that incremental FII money will not move out and that will help the market to restrict the fall.

So to my mind, RBI raising the rates is good and not bad for the market, especially where the markets have already factored in the evil effects of rate hike.

In nutshell, for next 3-6 months, odds are stalking against the market. From the top of 21,000 on 5th November, market has corrected 10% and closed at 18,860 yesterday. And timewise, we are back to September 2010 when the Sensex was at the same level. Generally, the markets fallen by more than 20% is considered to be in downward spiral. To negate that, for the vibrant growth market like ours, a 5-6% rise during next 1 month is a strong possibility. But instead of adding long position, one should be cutting down the long position during this rise.

So, yes, Market in coming days would test the patience of long term investors and will also create fear psychosis which will convince everyone that we are back to 2008 days. And that would be the time to be bold in putting your money to play... Will that be in April - May or June?
Lets See...

Now See the Short Covering Rally for a few days...

The best thing about the market is that when most people start thinking that the world is going to end, the market shows them how terribly they have gone wrong !

Market as expected started 2011 with a horrifying slide of almost 10%. Yesterday it touched 19,000 for a second and bounced sharply from that level.

Now what? Most people have given up on the market. Those who were bullish on "India Story" came complaining that there full 2010 year's gain have become half in just first 10 days of 2011...!!! They have increasingly become worried about the market and looking to come out at every rise...

Additionally, the IIP numbers released today has fuelled their belief of falling market... IIP for November came at a dismal 2.70% after the October at 10.80%. So, all the more reason to be bearish..! So, most "logical" action on this kind of news is to SELL - SELL - SELL.

But hey, after already a 10% fall from top, does that make sense? Who knows !

What I can say is that for a short term, it is a time to buy and specifically to buy many strong stocks, which otherwise you would not have got at this rate...Which are those?

To my mind, here goes the list:
CIPLA - A good pick between 340-350.
GAIL - If you get this at 495-505 levels, start accumulating
TCS - Good pick at 1080-1120 levels
Aurobindo Pharma, Hexaware, Hindustan Zinc are the stocks one should accumulate at a deeper cuts.

What happens Next? To my mind, at such bad news, when the weaker hands would book loss, the stronger hands would buy the stocks with a short term bounce to capture. Hopefully, we all would see 19,700-20,000 levels before the mid of next week.

What a beginning !

In Gujarati, it is said, "Putra Na Lakshan Parna ma thi, Ne Vahu na Barna ma thi..." (Son's character is known ever since he is in cradle and Daughter in Law's character is known from her first re-actions at the time of entering new home...)

If anything to assess for this year, look at the beginning... Just the first week of 2011 and Sensex has given away almost 1000 points...! Does this tell you whats cooking? Well, to me it tells a lot of stories. And stories are full of horror. And we all love horror stories, until we ourselves are part of one ! So if you are one of the investors in Indian Equity Market, start holding your breath.

When we are close to the previous top, very few would take courage to predict that we would be going all the way down...But, I do the honors, stating that this year the least we see is 16,000 sensex.

But, does that mean world is going to end? I guess not. There are many sectors and stocks which show much promising future and will emerge as a superstar when the entire market is going down...
Keep reading this space to know which these stock are !