I have been cautious on the markets over the last 2-3 months mainly due to extremely overbought conditions, global issues – mainly related to the Eurozone as well as the stubbornly high inflation domestically which has led to extreme tightness in the system and will lead to a short term slowdown in economic growth. Other factors which have come up over the last 4-5 weeks have been related to various so called scams in the markets as well as a standstill in governance due to the impasse on the 2G telecom issues.
The markets did correct, however they stopped before the level at which I would have thought that the correction is over and we can look forward clearly towards the year 2011. In the mean time most bulls have also turned bearish in the near term and the consensus has moved towards a correction in the short run and with some technical chartists also predicting that the bull phase itself is converting itself into a bear phase (extremely farfetched in my view).
Contributing to the strength in the markets have not been high growth emerging markets but markets of the
The strength of the US Dollar has also not led to an outflow from EM’s as would have been expected in the short run. However given the near term strength in the US Economy and the woes in the Eurozone the trend should be for a USD appreciation over the next couple of months. This at some stage should create a market sell off.
As is normally the case, as the markets started to correct we saw most market participants first turn cautious and then bearish in the near term. The consensus also veered down to a view of a move towards 5400 for the Nifty in the near term followed by an upmove. The markets did correct to below 5700 levels but has bounced back twice from those levels. Most mid and small caps have also got sold off severely and in some cases by 30-50%. The initial correction in this segment started from stocks where there were some management concerns and then has percolated down to more or less the entire segment where even better known and established mid caps have got sold off by 30% plus. This I believe creates a good opportunity for investors to accumulate for the medium term.
Taking all factors into account it seems more likely that we will see the markets have a positive bias till the year end and into the new year. We could get another sell off sometime later and as such we will need to watch out for that as the Eurozone issues and Chinese tightening to control inflation still have the ability to create deep short term corrections.
“More wealth has been destroyed in waiting for corrections than in corrections itself”- Peter Lynch
(Something that I would normally believe in being a bull at heart)