Dalal Street in the grip of a disbelief rally as bulls party while bears sulk

Indian stocks have climbed walls of worries and consistently closed at record highs all of December, much to the dismay of bears.

For most traders and investors on side-lines, this has been a rampaging rally of disbelief as blue chip after blue chip and sector after sector outperforms even the most optimistic forecasts.

And this against the backdrop of an economy that was severely impacted by the COVID pandemic and the ensuing global downturn.

This week has been particularly nasty for bears: mauled, bruised and battered they find no takers for excessive valuations, a farm protest on the outskirts of New Delhi, little fiscal legroom for government expenditure and an economy that is yet to fully come back on the rails.

So why is this happening? And for how long will the party last?

In one simple phrase: `Global liquidity’. And it shows no signs of abating.

Today, the following stocks hit record highs by percentages and volumes that are daunting to bears: Housing finance giant HDFC; private lender Kotak Bank; Bajaj Finance; chemicals giant SRF; pizza maker Jubilant Foodworks and a host of `sarkari firms hit 52-week highs: BEML, in particular. This list is LONG.

At its record close of 13,740 points on Thursday, the benchmark 50-share Nifty is now up a respectable 13 percent so far in 2020 despite plunging as much as 38 percent between January and March due to lockdowns aimed at controlling Coved. From its low of 7,511 points, hit on March 23, the Nifty is now up a whopping 83 percent, all driven by truckloads of foreign money.

Another sign of FOMO: ``the feeling of missing out’’ is the stampede for initial public offerings.

Burger King’s IPO of Rs 810 crore, priced at Rs 60 per share, was subscribed 157 times. Mrs Bector’s Food Specialities initial offering, priced at Rs 286 a share, of Rs 541 crore got more than 198 times the money required.

Large parts of this rally have been put in place by millions of `Robinhood traders’, who entered the market during the COVID lockdown. Armed with a laptop and an Internet connection, these traders have upended classical definitions of valuations and dislocated all technical charts. They buy stocks at any price and at all levels.

NOW WHAT?

Equity strategists are unanimous in saying that once the `liquidity tap gets shut’, bulls will have a torrid time defending record valuations on the Nifty, which now stand at 37.6 on the price-earnings multiple. Typically, the best that the bears have come up is: `you have price, but no earnings!’

A top-end options trader, who works with an east-Asian brokerage, says it’s "purely (foreign) flows that are chasing domestic stocks with little or no liquid float". So, in effect, the impact of a deluge of foreign currency (FII October inflows of $2.67 billion, November inflows of $8.13 billion and so far $6.27 billion in December) are altering the battle in favour of bulls.

The ONE thing all institutional strategists are watching is: the `Dollar Index’, a measure of the US dollar’s value against a bunch of currencies. A weakening dollar is a boon for emerging markets such as India. This index trades at 89.88 points and had peaked at 103 in early March.

"Every 1 point drop in the Dollar Index is worth at least $3 billion in FII inflows," said a strategist who declines to be named. "Such is the frenzy that you could see another 1,000-2,000 points on the Nifty."

So, for now the parties seem unending for the bulls as Diwali’s hesitant up-moves have morphed into a fully grown bull market that seems to be heading for a euphoric budget till February 2021. However, signs of froth are amply visible in some parts of the market. But only time will tell when the correction will set in.

A broker, who has been in this market for the last four decades, says keep an eye on the exit door and watch FII inflows with a hawk’s eye. Any pause, worse a reversal, will be a sign of an intermediate peak.

Additional Reporting by Sharad Dubey.