Traders currently eyeing individual stocks

What’s happening with the market since past few days is it become a bit of a fence sitter or looking prime to make some kind of move?

Its not become, its been a fence sitter for quite a few weeks now but the one thing which is happening is that the range is getting smaller and smaller and that typically happens in a market when traders have extremely high conviction that the upper end of the band will not be breached and the lower end of the band will not be breached on the way down and therefore as soon as they get to anywhere close to that end, they start reversing their trade. Now people don’t even wait till 5,000 to see if trade is going to reverse, whatever little they get, as soon as they get to 4,800 they start covering up their longs, people don’t even wait to go to 4500 so they cover up around 4600 or 4650 if they were short, so that typically leads to a range compression.

We started off a month back with a 4500 to 5000 kind of range, but right now its been getting narrower and narrower. First it become 4600 to 4900, the Nifty founded difficult to get above 4900, leave alone 5,000, on the way down, it found support at 4600, did not go all the way to 4500. In the last couple of days, this is just trader’s talk, it’s got even narrower, and the range has become 150 points, 4650 and 4800. I think very little conviction that the long trader has above 4800, very little conviction that the bearish trader has below 4650, so we have now got compressed to just a 150 point range on the Nifty, now this cannot last forever.

I think the compression of the range has come at a time when you got two potentially market moving events ahead of you, first the inflation number tomorrow and then the Infosys Guidance on Tuesday. Both of these events, if they turn out to be better or worse than expectations have the capacity to move beyond the very tight narrow and tight range it has got stuck in. We are in an interesting situation with the range compression that has happened over the last few days from a trading perspective.

The good thing that people are now saying that it’s a mug’s game, its 50 points up and 50 points down on the Nifty, that’s better left to the professional traders because most people can’t carry these kinds of swings, So the attention is now shifting to midcaps and smallcaps. Not just yesterday and day before, through the last 7-8 days, midcaps and smallcaps as a class have outperformed the Nifty and that may well continue if the Nifty doesn’t slip out of its range, and that is probably the desirable thing for the market to happen. Get stock specific, its earnings season, and forget about the Nifty and what it has to do, it will do what it has to do over a period of time.

Global cues:

What’s happening in the global markets is also quite interesting. We started off with credit market concerns which were a localised financial market scare, which had the markets looking just at that. Then it was a macro scare which the people are looking at GDP data, employment data, non-farm pay rolls, housing data so that was macro economic. What has happened in the last three or four sessions in the US markets primarily is that now it’s drilling down to where it hurts most, which is corporate earnings. You are not looking at write off’s any more. You are not looking at microeconomics GDP data any more. You are now saying what is my company going to do at the end of it because I’m buying a stock at the end of the day, and whatever else that I’m talking about is peripheral and at best an indication or a hint to what my stock is going to deliver at the end of the day. And I think that last bit of the coin is dropping now, where people are looking at the last end of, how individual stocks are getting affected. We need to go through this phase now. People are slowly waking up to the fact that they no longer need to be concerned about something which is very distant, which they cannot map but its now drilling down to their own lives as individual stocks shareholders.

It was Alcoa the first day, now there is talk of even Google. So you are not getting a great feeling at the pit of your stomach with corporate earnings in America and I would watch with great interest, of how S&P pans out over the next 1 month as earnings trickle in. If it can defy even slow or sluggish corporate earnings, then I think it’s a huge sign that the market is digesting all the bad news thrown at it whether credit, whether macro or even in terms of the corporate earnings and it’s not willing to fall any further. But I think this is going to be the test now because it’s now beginning to hurt individual stocks.

The other big issue for the market globally is commodities.  Crude has been the graveyard of contrarian traders, just keep calling a top for that and it goes down a bit and comes back and hits a new high, that’s extremely disconcerting for all equity markets investors. Not crude per se but the way commodities are moving, they refuse to cool off, they are not showing any signs of having toped off, grain prices are hitting all time highs, crude is at an all time high, gold is bouncing back. As long as this kind of commodity situation remains, I think even if you don’t fall globally serious out performance might be restricted because that will sit on the equity markets back.