Mkts in capitulation phase

CNBC-TV18's Executive Editor, Udayan Mukherjee

Are markets in capitulation phase?

Completely. This is the last bit of capitulation, I don’t know whether this is the last bit or whether there is more to come. But it looks like another leg of capitulation which has happened this morning because we have had bad global days before. But right now, the way the stocks are being thrown is a clear sign that people are giving up - even holders of stocks are beginning to give up. Mind you, this is a start of a new series. We are not talking about Rs 85,000 crores of stock futures positions.

This is fairly light kind of a market technically speaking, from the F&O perspective. So there is no mayhem from that side - big margin calls, massive unwinding of futures positions, I don’t think there is much of that. There is some amount of that ;but not much of that which is driving prices down. This, I think is capitulation happening with holders of stocks who are now beginning to sell some of their midcaps and smallcap holdings because they believe that the market is going to fall and they will not get a exit at even marginally higher prices.

The biggest problem is that in the largecap names stocks have fallen between 8-9-11-12% today - the Index, there too we are not seeing any meaningful buying emerging because at no point in the day have we seen some semblance of a recovery happening and that tells you that there is nothing much by way of institutional support which is coming in. Institutions are rather standing away from the market and saying we will find much lower levels to buy over the next few days.

There is no rush to go out and buy right now and this is a dangerous kind of situation. Even after the sun outage, there was no sign of recovery at all. Market looks terribly oversold, just in the context of the last 3 or 4 days; not to say that the market couldn’t go to lower levels from here. But just in the last one-week, I think the market has got had a crunching fall and therefore it seems a bit oversold. So at some point, I don’t know if there is even a little bit of good news which comes in, one could see a sharp recovery. But I dare say that those recoveries might just get sold into now because confidence has got completely broken after this mornings fall.       

What's troubling the markets?

I think retail, HNI - that kind of crowd is deserting the market and there is no buyer. So prices will only stop falling when once a segment of buyers comes into the market. If domestic institutions, insurance companies, mutual funds are not buying and FIIs are clearly not buying right now, then who is going to absorb that events-limited supply of paper which is coming into the market. So that’s the problem right now. One can see those levels are not mattering at all; 5,000 broke, 4,800 broke - not even with a sign of minor resistance around those levels on the way up.

So I don’t think anything is working in this market; it’s getting more and more oversold and just no buying is coming in. My sense is it's complete absence of buying rather than anything else for which stock prices are falling like this and rallies are just so infrequent and shallow and just not holding. So I'm disturbed to see the kind of prices on the screen today - not disturbed that some of the more actively traded companies are fallen off, but more disturbed at what some good quality stocks have done today and the way they have fallen off.

So it doesn’t surprise me that an Ispat is down 11%, Nagarjuna Fertilisers is down 11% or RNRL is down 11% even Reliance Power down some 11% odd. I think the bigger problem is what’s happening with some of the ICICI Bank kind of stocks which have fallen quite alarmingly in today’s trade - Those, I think, the way those stocks are falling tell you that there is something by way of an abrasion which is going on in the near-term which might just get corrected just for a day or two.    

What's happening to stocks like Unitech, ICICI Bank, Siemens, Tata Power?

It's possible - today would be the kind of day where there could be some Nifty shorting as well because the FII have been covering up some of their Nifty shorts these last few days and maybe they found fresh reasons to go out and short the market once again. Typically when there are fresh Nifty shorts, largecap names tend to get hammered a bit. But anything which has a little bit inkling of bad news or uncertainly about its getting punished really badly in this kind of a market; because we are in a kind of a market now where somebody needs a reason to sell, and just latching on to anything - so if there is an uncertainty in banks with their balance-sheets, sell them.  If Reliance Energy buy back price is not good, sell it. If ICICI Bank even has a lingering suspicion of some thing to come - more to come by way of subprime exposure, sell that stock down.

Real estate, the mood is bad, somebody came on CNBC this morning and spoke about how Chinese companies probably could be trading at 50% of their NAV, sell some of those real estate stocks down.

So we are in that frame of mind for the market where people just want to latch on to bad news, there hasn’t been much by way of good news but anything by way of good news is ignored. So as soon as the market opened after the sun outage, the one figure which people latched on to is the 5%+ inflation figure, one more reason they got to sell down stocks and to panic and that’s what they have latched on to - typically this is what bear markets are all about, that you just focus on bad news, that is exactly what you want to discount and you want to ignore anything by way of good news because that won't last and that’s the phenomenon which is playing out on the screen. So no surprise at all that  the market has broken down so effortlessly below 5,100, 5,000, 4,800 and has come down to 4,700.

What's due for largecaps, midcaps, smallcaps?

The fall last time was about 40-50% for most midcaps. You can safely say now after today’s fall many midcaps have lost 60-70% of their marketcap. Many largecap names in the Index have lost between 30-45% of their marketcap - ICICI is a classic case in point - that’s lost 40-45% of it’s marketcap in the last one month. These are dangerous signs - the last time around, largecaps fell 20% and midcaps fell 40%. This time largecaps are falling 40%, the Index is down probably 30% after today’s fall; from it’s recent peak and midcaps are falling 60-70%.

So you can imagine what kind of erosion and damage would have happened to the portfolios of people. This kind of fall does not get over very easily. This is much worse than May 2006 because this time around there is being no redemption. You had a fall, you saw very small recovery and the second leg of the fall is taking you back even below. That’s the point, which somebody else was making - that the Index might still not be at 4,450 or wherever the low was. But so many stocks in the market have broken back below January lows and already trading below those lows having lost 60-70% of their marketcaps.

So the damage has been absolutely astonishing in most stocks and who knows where it will end. But you have seen the way or the magnitude with which India is underperforming most of the other Asian peers or global peers over the last few days.

So we outperformed most markets on the way up and now we are just setting ourselves up for a lot of extra punishment or maybe even underserved punishment compared to other markets. But that’s the way our markets move, we have always been at high beta market, we have always been a market where because of the retail HNI participation and stock futures, which a lot of other markets do not have  -we do the both ends of the spectrum with huge amounts of excesses.

So when they go up, we look like the most startling and spectacular market in the world. When we fall, we fall so irrationally that we look like the market is absolutely ended and we are actually in a bit of an economic recession or anything like that which is not the reality but that’s how our market always moves - hugely excessive on the way up, hugely excessive on the way down.