Death to the bears, suddenly all bears are looking for horns to wear

All the bears turn bulls, what now ?

The weekend turned out to be an amazing one with the political uncertainty coming to an end in the country in just one day. The wide speculations of horse trading, big negotiations to support either the NDA or UPA by smaller formations etc. came to an end as the UPA swept the elections (in a sense) and now the country is in for a stable 5 year government which should be very positive for the economy as well as the stock markets. The vote for stability will immediately have two impacts, the Indian currency will become stable with a positive bias, most government programs will move on with continuity and there will be stability in policies. The key government ministries are also likely to continue working the same way as they have been and lot of project awards in the various infrastructure segments like roads, urban infrastructure etc are likely to take off in a big way.
However the key of this article is not to focus on the long term or talk about where one should be investing now as I have talked about it extensively in my previous articles –“What are the kind of stocks/sectors one should be buying today” and “short and medium term market outlook”. I still would like to reiterate the fact that I clearly believe that we are in a new bull market, which I have been maintaining in all my articles and that this is not a bear market correction that most commentators harp on. The most important observation that I have over the weekend after watching TV extensively is that all the bears of the markets be it people like the two eternal bears who were seen on a prominent business channel every day since the markets started to fall last year have suddenly turned positive. In February 2009 when I thought that I was the only bull standing on Dalal Street and the markets were hovering near a Sensex level of 8200 most of these people were of the view that the markets are going to fall to 6000. These same people are now saying that the markets are going to move into a new trading range of 12000-16000 now. An immediate upside of a few percentage points is off course possible as cash on the sidelines gets deployed and desperate MF Fund Managers (who have been holding record levels of cash), Hedge Funds (who are low net long or short on the markets) and retail investors (who are turning desperate after a 50% up move and the feeling of being left out is growing in everyone.

The key is that there are some important points to be considered for the near term –

  • The markets did not fall pre election, infact markets kept on moving up despite all predictions of a hung parliament. This shows that there was really not much negativity related to the elections results built into the markets. Infact Indian markets outperformed a large number of other emerging markets.
  • Anticipation of large scale reform measures might be premature due to three important state assembly elections at the end of this year. There might be lot of noise but key reforms like labour reforms; disinvestment etc. will have to wait till then.
  • Most global markets are looking heavily overbought in the near term and are ripe for a correction. Since in the near term India has largely been a part of the overall emerging market rally India will not be immune to the correction in these markets as it takes place. The upside of the Morgan Stanley Emerging Market Index in the near term in my view is unlikely to be more than 4-5%, which should be followed by a 15-20% correction.
  • Key markets like Korea, China, Brazil and Germany which have led the rally in global markets are looking somewhat exhausted and are looking to correct.
  • The VIX index looks heavily oversold and should bounce back, an upward move in VIX is typically correlated with a market correction.
  • The US Dollar after depreciating over a period of several weeks is also looking oversold and should bounce back, similarly the Yen after continuously losing value is looking to move up in the near term.
  • After talking about “green shoots of recovery” in the global markets, now slowly issues related to growing unemployment, slowing economies and increasing fiscal deficits are coming back again.

    After considering all these factors and the fact that the last of the bears are looking to throw in the towel in the India markets in the near term, I expect that after the initial bounce that we might see the markets should correct their move from the bottom to whatever levels they peak out at. (Should be around 3800-4000 levels of NIFTY). Post event euphoria’s and panics typically do not last very long. (As we saw in the aftermath of the 26/11 Mumbai attacks, similarly post the 2004 elections the market crash was followed by a big up move).
    That said the long term prospects of the economy and markets should improve significantly and the current bull move which has just started two months back should last over the next several years. As such those who are already invested should enjoy and those who have a big left out feeling should get into the markets over the correction as and when it unfolds over the next few weeks.…….

    Over the last two weeks I was feeling exhaustion coming into the markets; however the only thing which was not falling into place was the widespread skepticism about the bullish up move. The election results will be used by lot of people with bearish views to turn into bulls using it as an excuse for change of view. Remember

    “A public-opinion poll is no substitute for ones own views”.

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