Q: The market probably sensed it coming. The monetary policy started it, will the fiscal policy take it forward?
A: It will all happen sometime next year and that is the key thing which the market is pondering over. There could be two outcomes. One is the withdrawal of the fiscal stimulus which the Prime Minister is talking about coinciding with some tightening on the monetary front. This means that  interest rates will head up in the near-term maybe starting Q1 of the next calendar, coinciding perhaps also with some amount of tightening or indication that the lose monetary policy globally will not continue for very much longer in the early part of next year at least and indication.

All of this when comes together may send the sense to the market that earnings growth triggered off or sparked off by this kind of stimulus may slowly start to wane. That is the billion dollar question for the market because after this earnings season a lot of people are asking whether going into fiscal year 2011 earnings growth will be as strong as the market has increasingly begun to price in.

However, now stimulus is withdrawn, interest rates go up can earnings go up at the pace at which the market is beginning to discount in stock prices? If the answer to that is no then I suspect that at some point there will be a pause in stock prices, maybe even a correction.

But sometimes in the past this happens that when the market sees this possibilities as you are saying that this is something the market has been deliberating on it discounts it. Therefore, when the events happen, it keeps climbing those walls of worry which when they happen the apparent reaction from the stock market should be to go down but it doesn’t go down.

So I don’t know which it is, if this is really a strong bull market then the market probably will climb those walls of worry. But if it is earnings negative next year, at least a pause or a pullback should not be wished away completely.

Q: What about the Nifty?
A: We have comeback to 4,800 and now questions will be asked once again. We are just entering that zone where there could be some resistance for the market, this zone of 4,800–4,900. Can the market wade past it? It can because the global markets are still quite supportive. Once it gets close to 4,900, in the first round people will probably get out because they will not have enough conviction after the sharp fall that we witnessed last fortnight.

Could global markets hold up and liquidity hold up beyond 4,900 and take the market beyond that? We will have to see, one step at a time. But after the volatility of the last week the market has fallen, it has rebounded to some kind of a mean level. If it tries to hold a bit of a trading range for a few days, there is nothing wrong with it. We should not expect the market to fall to 4,500–4,600, immediately in the next week if we bounce back to 5,500–5,100 that is being too volatile. So if one makes a guess, the Nifty might try to fall into a 4,600–4,900 range for the time being and then depending on global cues take it from there.

Q: What about the internals?

A: A lot of short covering has happened already. If one looks at the foreign institutional investors (FII) numbers, they bought quite a bit of Nifty Futures which is what one wants to see from here on. One wants to know whether there is life beyond the wave of short covering because the market got short at heavily and then the shorts covered up when there was that really sharp bounce back from 4,600–4,800.

Now that that is more or less done is there more liquidity stimulus to this market to climb 4,900–5,000 those levels. We will have to see that. Quite a bit of short covering has happened even at individual stock levels. We saw how Suzlon bounced back and how the open interest has come down there. It has happened with a few telecom stocks as well. So it’s a savaged bout of shorting which happened in the last leg of the fall that has more or less started unwinding and probably has unwound in many cases. So you would now need fresh money and probably delivery based buying once the short covering is done to push this market beyond 4,900–5,000 to that the question is a bit unclear.

Q: Many global markets got away okay last week. The Dow was up 3% but some of the data points are frightening like 10.2% on unemployment.
A: It is frightening but the market’s reaction is also quite interesting. If this was technically a very weak market then 10.2% in unemployment would actually have broken the back of the market at least for a day or two.

However, it almost got shrugged-off and the market chose to focus on the positives. In that Paul Mc Culley of Pimco made an interesting point and that is the central point of what happened on Friday after the unemployment number is that the market chose to focus on the positive. It is like the market saying this market is based on liquidity; it’s about what is going on with the dollar and what kind of money is going into asset classes across the world. If 10.2% unemployment means that  the Fed does not have a hope in hell of tightening in the near future then why should the dollar bounce back and if the dollar doesn’t bounce back then why should our happy liquidity trade end anytime soon.

So we are worried about the unemployment number but our party is a liquidity party and for that to break the dollar has to rebound. If interest rates are not going up in the next few weeks and months then the dollar rebound should not be expected. Therefore, we can party on. It is almost that kind of reaction which played out and if short-term liquidity goes there is some merit to that.