Last week, the market witnessed a terrific comeback, says Udayan Mukherjee, Managing Editor, CNBC-TV18. It rallied 4.5 to 5 percent in 4-5 trading sessions, with a 10-12 percent surge in midcaps. The Nifty closed Friday up 82.40 points at 5945.70.
Global markets have remained stable, with US indices touching all-time highs last week. Earlier, the market seemed on the verge of a correction with the pre-Budget bearish trend plus weak global cues. But this was followed by an unexpectedly ferocious rally, mainly triggered by a turnaround in flows and positive global cues.
The Dow Jones closed Friday at 14397.07, up 67.58 points, and the S&P at 1551.18, up 6.92 points.
So, now we should see if we can build on last week’s pullback.
I think the reason why our market did well last week, was the fact that the Prime Minister and Moody’s Analytics, not the rating agency, came out and said that growth will be much better in 2014. I don’t set too much store to that kind of talk. I think the market has picked up because of flows stabilising and global markets picking up. If the market is building hopes on GDP growth being high, I think it is working with short memories. You just have to go back to February 2012, which is exactly about a year back which is the start of FY13 and ask - what was the Prime Minister talking about in terms of FY13 growth.
The Prime Minister on February 2012 was talking about 7.5 percent growth for FY13. We are ending up with 5 percent. So does an outlook from him saying things will be better next year hold a whole lot of credibility? Not in my books. You go back to Moody’s, I think the number was roughly 6.5 percent projection for this year and we are ending with 5 percent. So, economic projections in the environment that we live in today are pretty much like stock market predictions. They may come good, they may not come good and they did not come good in the last four quarters.
This is not to say that one does not believe that growth is not going to be better next year. Sure, we are not going to have 4.5 percent growth or 5 percent growth in FY14 - that’s nobody’s case. Growth will pick up because we have hit some kind of a bottom around this 4.5 percent hopefully. But we have also got to ask, whether the stock market is not pricing some of that in already because if PE multiples were also at a trough with 4.5 percent GDP, then you could have said that stock market has to move in line with any expectations of economic growth picking up. But with 4.5 percent GDP, is the stock market trading at 10-11 PE today?
The answer is no. The stock market is trading at nearly 15 PE. So lot of this expected turnaround we are talking about for next year is already in the price - that is why the market is at 20,000 today. So, I didn’t set a lot of store by all this talk that the PM will breathe fire into the market by saying that next year, growth will be better than this year - that he said last year as well and went terribly wrong with that. So, give that a wide birth, the markets are up because global markets are up and flows have started picking up again. That’s the same trick which has kept our market going over the last four quarters.
I thought that on Friday, the market had already entered the tricky zone, but it negotiated that very well. If you just talk the trader talk, traders look at these kinds of pullbacks as 50 percent retracements then 62.8-63 percent retracement of the fall that we had from 6,100-5,650. I think we took all the levels out very effortlessly, indicating that there is a bit more momentum than this being just a pullback. Else, the market might have stalled just below 5,900 or around 5,940, but the power with which it has pulled back, should make traders revisit their hypothesis of whether this is just a pullback or it could be strong enough to take the market to 6,100 for a retest of that in the near-term if global flows continue.
It is the stock market, so you should not rule out scenarios. It started with looking like some kind of a short-covering bounce, but I think five-years closing would have forced or should have forced traders to take stock of a situation. That does not mean that the market continues to go up 1 percent Monday, 1 percent Tuesday, 1 percent Wednesday because it has already gone up 4-5 percent in the last one week.
Is a breather due? I think it is. Can this breather happen now, can it happen at 6,000, and is it going all the way to 6,050-6,100 before the breather or a pullback comes in? These are all very difficult things to say because they are mapped by global liquidity, which is almost impossible to predict. So for now, I think we are in a fairly strongish groove in the market. Can one take long positions starting where we are now if we start off in the green today? On the back of 250 points of a pullback or more, if you are mapping it from the recent lows, I think you would need to be a brave and an aggressive trader if you are building fresh long positions here.
But I think the trader would have seen enough last week to indicate that there is some semblance of momentum in the market. I think this market may even surprise going into the retest of 6,100. Whether you can play that starting today if you are not already long, I think is a slightly aggressive call.
I think people are tracking the mother of all markets which is the US. There should not be doubt that the Dow has been in a bullish groove for the last couple of years, and that continues. Anything which is hitting new highs and continues to make fresh ones is by definition some kind of a bull orbit, and the US market is in one. That’s where most of the liquidity in the world gets generated. So if you are tracking liquidity and that is the right thing to do from a near term perspective, then I do not think there is anything which has happened in the last few days which would warrant caution. So we got Rs 1,300 crore in the cash market, some short covering from the FII’s on Friday. So in the near term, once again, the liquidity picture has turned benign. It was threatening to break down a week or a fortnight back, but suddenly it all seems good right now.
Can that change again? Sure it could change on some negative development, but as near term technicals go, you would have to move with global liquidity because that’s the big game in town. That I think is the key thing about this market, that whenever people perceive global markets and liquidity to be in a strong groove, then you can put a positive spin to whatever data you have. I think what’s justifying the main trend is global liquidity, post facto. In the near term that’s the thing which has been leading us higher and pretty much every global market over the last one year and that’s the one thing which you need to keep your eye on rather than get swayed by the fundamental reality which I think continues to be still very challenging.