Sensex cracks; but bulls may not throw in towel yet: Udayan

The BSE Sensex fell over 2 percent on Monday, with the Nifty retreating from a near 2-1/2 year high, as ITC slumped on profit-booking, while technology stocks such as Tata Consultancy fell on continued concerns about a US immigration bill.

Weak Asian shares also weighed on sentiment. ITC fell over 5 percent, while Tata Consultancy Services lost 2.4 percent.
A correction was always expected but the quantum of today’s fall was a bit of surprise, says Udayan Mukherjee, managing editor of CNBC-TV18. But he feels the bulls will not throw in the towel just yet. “Yes, they (bulls) would be a bit rattled by the ferocity of the largecap sell-off today but do remember that the 6,100 level ballpark is the highest level the index has seen over two years,” he says. Below is an edited transcript of Mukherjee's comments on CNBC-TV18. On the quantum of fall
The quantum of the fall is a bit of a surprise because a reaction would not have been surprising at all given the ferocity of this rally all the way up to 6,100. Even last week the market put on nearly 3 percent. So, a bit of a reaction was probably always on the cards but given that global markets have not tanked today, we have seen a 100 points slide on the Nifty, which is a bit surprising.
But seen in the context of 600 points rally over the next 20 days, the bulls will not throw in the towel just yet. Yes, they (bulls) would be a bit rattled by the ferocity of the largecap sell-off today, but do remember, the 6,100 level ballpark is the highest level the index has seen over two years. So, when you are negotiating an important level like that, which is a two-year top for the Nifty, a little bit of volatility creeping in at those kinds of levels is only to be expected. I do not think today necessarily marks or signals the end of this uptrend.
Sure, people will become far more vigilant because the Nifty has tested sub-6,000 levels today and if it goes on to close around the lows of the day then I think some fresh guard taking will happen tomorrow onwards. So the ferocity of the fall indeed is a bit rattling. But given the fact that the upmove has been so sharp, I guess the bulls will hold out for a few more days and see which way the wind is blowing before initiating any kind of short positions in the market.
Why market might have crashed?
Some of the stop losses for traders on the long side would have got triggered. For the extreme short-term trader, those positions would have got knocked off for sure. Now, it is the positional long trades, which are still probably standing; some of them might have got stopped out around 6,000. But 5,900 -- if the Nifty is ready to go down more from here -- is the bigger level, where a lot of the long positions might get knocked off. So, there is probably room for another 100 points from here to absorb for strong positional hands beyond which I think trades will start to get reversed. On trade deficit data and rupee
We have just had one bad data point after two or three months of some kind of repair work on the current account deficit. However, there is some room for apprehension out here for sure because the rally we have started 20-25 days back or three to four weeks back had its genesis in the fact that the current account deficit which was India’s big bugbear would start improving on the margin with the fall in gold and crude prices.
So, today’s trade deficit number is a bit of a wake up call on that aspect where people who are taken for granted that lower gold prices necessarily mean that the trade deficit would come down I think are presented with a very different scenario that gold imports and gold demand has gone up so much that it has offset not only the price fall in gold but has actually gone to the other extent.
Just the April data for gold imports, one should not extrapolate for subsequent months because something dramatic happened in April in terms of the way the price of gold fell off and that might have prompted the sudden spurt in gold prices along with some seasonal factors. So, it is one month’s data, one should not despair on the back of that. However, for people who were getting very complacent about the current account deficit they may have received a bit of a jolt today.
So, I don’t know whether this is the only reason for the fall today, sometimes when markets have gone up a lot they need any trigger to correct and the trade deficit number might have handily presented itself as the trigger to usher in the correction today. So, it is more an excuse or a trigger to correct rather than it itself being a massive macro negative but it certainly is a wake up call for people who were assuming that the current account deficit would go down to 3 percent kind of levels by the end of the year.
It may well go on to but you cannot take some of these things for granted as today’s numbers just pointed out. It has ramifications for the rupee which has gone back to 55 and that is obviously not stock market positive.
_PAGEBREAK_ On market internals
Since last week, stocks were going up because a lot of the very strong hand global money was going into high quality names. At very late stage of the rally, you can often see that some of the foreign money, which walks in does not walk into very high risk names because the market has rallied quite a bit and they want a little bit of safety under their belt in case of a reversal, which is why the market last week became a bit narrow, the Nifty did better than the midcap index. Within the Nifty, some high quality names like the ones you mentioned did much better.
What we are seeing today is that a lot of foreign money perhaps because of that deficit number perhaps because of the fact that India has outperformed off late and is standing at a two-year peak today, a lot of profit taking is happening and that is where money is coming off names like ITC, Bharti Airtel, even some of the pharmaceutical names and a couple of the auto names.
So for now it looks like profit taking, which should not surprise anyone given that we had a fairly surprising 10-12 percent kind of rally coming out of nowhere. So 100 points is fine. The market can digest that; but is this the sign of a U-turn in the market? I think till 5,900 people will not make that conclusion, maybe short-term traders will try out a short trade here or there to scalp some near-term gains but I think once we start getting to 5,900 and below that ballpark area of 5,850-5,900 that is when the bears will start to flex their muscles once again.