See medium-term consolidation in mkts: Alchemy Cap Mgmt

K Vaidyanathan, CEO, Alchemy Capital Management, said, the fall in crude prices and hopes of reforms are driving sentiment in the market. "The bottom may be tested in this consolidation. One must not look for more strength in the medium-term but at consolidation. The larger macro-economic situation needs to play out."

According to Vaidyanathan, the inflation base effect will come into play in February 2009.

Excerpts from CNBC-TV18's exclusive interview with K Vaidyanathan:

Q: What t has been happening in the markets these past few days? Do you get the feeling that some of the big concerns like crude and politics are actually getting alleviated from the market now?

A: I would not recommend anybody to run ahead of the markets at this stage. Crude prices have come off about 20% or so and that is a real benefit to global markets and economies, and India is no exception to that.

There is promise and an expectation being built of certain things happening. Politics is marginally out of the way. We can have some expectations of certain things happening. I don’t think we should run ahead of the market, which is reacting to something that is positive and something that is promised.

What we saw at about 12,500 was a bottom formation. When we next come to those levels, the market may find tremendous amount of support at that level. We saw volumes kicking-in in a big way and saw the markets broadening the interest of stocks. We saw discounts disappearing and small premiums coming up. These are signs saying that 12,000-12,500 was a bottom formation for the market.

But it is not going to be an easy bottom. We could still see that tested a couple of times over this consolidation phase.

Q: To get a handle on what the medium-term performance might be or whether or not we can sustain some medium-term strength, what do you think might be the most important catalyst?

A: We have got to be real in expectations. One shouldn’t be looking for medium-term strength. One should be looking for medium-term consolidation. The market trades within a range of 20-25% and stays there. I don’t think we need to run ahead and expect medium-term strength because the bigger issues have no quick fixes.

We need to sweat those things out. Things like fiscal deficit, interest rates spiking, and the oil situation have no quick fixes. One needs to wait for those things to play out. Once 2009 kicks in, our study shows that by February or so the base year change effect will show.

For the medium-term, about six-months or so, a more realistic expectation would be consolidation of the markets. There may not be more bad news out there. When macro situations improve, then the markets will be well positioned to run up from there.