Experts decode: Momentum with bulls, but book out or stay?

At first glance, does the Indian market look overpriced?

For some investors and analysts, yes, as they watch many blue chip stocks poised on the verge of breakouts. After a terrific party over the last 40 days, the Nifty has been making a few feeble attempts to take a breather in the last few sessions. The question we ask is - is the trend still in favour of the bulls or will the bears come marching back in soon?

Deal or No-Deal?

The downtrend in the mood of global markets, especially the overhang on Greece, left a mark on our market today. The Sensex closed 82 points lower at 17,748 while the Nifty ended at 5381.60, 0.57% down.

European markets are wary of Greece fulfilling its debt obligations and have every right to be. The Euro region now awaits Greece's parliament's acceptance of the austerity measures and a package of economic overhauls before the eurozone backs a 130 billion euro loan deal for the government. So what the Eurozone is unanimously saying is - unless Greece gets its financial books in order, they won't see any money. Period.

Book Profits or Stay Invested?

We patted ourselves on the back yesterday when we closed above the 5,400 level. But today's move is not really a savage down move or any kind of down breakout, argues Rahul Mohindar of viratechindia.com. He says the Nifty has been steady in this 100 point band of 5,320-5,400-5,420. "So don't waste time over-interpreting the situation," he says, adding that in a strong upmove, these kinds of corrections and these kinds of intraday corrections are quite expected.

Market's heady run has Mehraboon Irani, principal and head - private client group business, Nirmal Bang Securities seeing more on the upside. While the market has gone up a little sharply, he urges investors not to be fooled. "The fact is that the market has surprised everyone and most of us believe that the second half of 2012 will be better than the first half of 2012."

But is it time to book profits even though there are clear indications that the market can move higher? Irani believes so, even while he thinks a 20% up from the lows and with many of the scrips giving a return of 40-45%, it is time to take some money off the table.

For Mohindar, if 5,300 breaks, investors might see the odd 100-120 point fall coming but net-net over the next one or two months, he says 5,600 is on the cards.

5,200 A Sacrosanct Level?

The January rally has definitely surpassed Amit Dalal, executive director, Tata Investment Corporation's expectations. In December, people were talking about the Sensex touching 18,000 by year-end. "We seem to be nearing that level almost 11 months ahead," he says.

Whenever the market went down, people said it will withhold 5,200 and bounce back. But when it went below 5,200 it really crashed for a long period of time. So Dalal believes that if this market holds above 5,200 in any period of correction or consolidation, it has the potential of an upmove.

His only worry is that everybody now is positive rather than cautious which is what they were about two weeks ago and this perhaps is not the best sign for the market.

The IIP Fiasco

The Index of Industrial Production (IIP) numbers have been a disaster. The lower-than-expected IIP digits grew by just 1.8% year-on-year in December 2011 due to contraction in mining and capital goods sectors. Output of the manufacturing sector, which constitutes over 75% of the index, rose at a low rate of 1.8% in December, compared to growth of 8.7% during the same period previous year. Market, not surprised, had factored in the numbers and hence it didn't weigh heavily on market sentiment.

Worsening Fiscal Deficit

The fiscal deficit is, by all accounts, likely to exceed budget expectations. The warning from Standard & Poor's couldn't make us any more nervous. Asking India to reign in its growing fiscal gap can possibly shake investor confidence, if a downgrade is on the rating agency's mind. The fiscal deficit until December touched 4.3% of the gross domestic product (GDP) for the entire financial year, just 0.3 percentage points short of the Budget target of 4.6% of GDP.

The rupee is also reeling under pressure of a widening trade deficit which has soared to USD 148.7 billion during the first 10 months (April-January) of the current financial year. The larger the current account deficit, the weaker the rupee vis-a-vis the dollar, which makes imports costlier.

Hot Liquid Money

So with so much of negative newsflow, what is pushing our market to rally? Is it just the money flowing in?

After pouring more than USD 2 billion in January, FIIs have already bought equities worth USD 1 billion so far in February.

Dalal explains that we have to bifurcate between domestic and foreign. Domestic institutions are seeing selling, they are seeing redemptions. Traders and dealers are getting sharper by changing their mood as soon as they see a change in trend.

"I am unsure as to how much of flows should we take into consideration domestically when we evaluate the trend in the market. Now the flows come from overseas and the technical positions come from the domestic market and they usually are unilateral in their movement," he adds.

For now, it appears that an improving economic scenario and positive investor sentiment makes our market a great bet for foreign investors looking to park their cash.

Chelsea Saldanha
chelsea.saldanha@network18online.com