Money Tree

Well that is a question behind every one’s mind now when we are at striking distance from the crucial level. Recently most of the global markets have made their all time highs and are continuously making new highs.

A few days ago there were more negative and cautious sentiments in the markets more experts felt that the markets are slated to go down as the valuations are not justified at these levels and there were huge short positions built up in the market but as everyone of us knows that the markets go in the opposite direction from where the masses are and the masses were either short or cautious and in the past few trading sessions we have seen how these shorts were forced to be covered and the discount of about 40 basis points between NIFTY spot and NIFTY futures turned into premium today of 0.07 (however as per the closing stats the NIFTY futures closed at a discount of 3.4 basis points). There are now very few short positions in the market and most of the sectors have started moving up with more and more stocks participating resulting in a broad based rally. It is this time when the retail investor who remained on sidelines or was cautious during the upmove sees everything moving up and feels that he has missed the rally and jumps in to participate in whatever upside is left. More long positions are created, experts on media turn bullish and encourage the investors to jump into the markets and a euphoria is built up as if there are no chances of markets going down. This is the time when the smart money starts selling to the investors who had missed the rally and are now participating, the markets do move up for some time as the momentum was there but a small negative trigger comes in and a sharp cut is seen.

I do not mean that a correction will be seen tomorrow or the day after but a ground seems to be building for one, may be a few weeks later, may be after the sensex has crossed 15000 mark or may be when the sensex is just short of it, whenever there is a gung ho peception of an upmove in the markets. Remember that the experts and analysts appearing on media would take no time in changing their views and people tend to forget what they had said a few days ago.

We are discussing hereunder some factors which would have an impact on our markets in the next few months and one of them might push that negative trigger.

Monsoon

The monsoon is expected to be above average this year and our economy is still so much dependant on it that it does affect our markets to some extent. We will have a positive impact of the good monsoons on our stock markets.

Quarterely Results

The first quarter’s numbers would start coming in from the next week onwards and we might not see as much growth as we have been getting in past few quarters. There would be some sectors where the growth would slow down a bit and the stock prices react negatively to any negative growth. The interest rates have risen during the last one year and the real impact will be seen in the first quarter, particularly on Real Estate, Auto, Cement and Textile sectors. IT Sector will have to cope with the appreciating currency and higher employee costs. There would be some companies which would out perform under these negative conditions still there would be a lot of them who would succumb to the pressure. Well, no one can guess what it could be so let’s wait for a few days and let the story unfold itself. But this is going to be a major trigger for either the markets going up or coming down. However if advance tax numbers are any indication then we are going to have good positive results for the first quarter at least in the large caps.

Forex

The appreciating rupee has kept the IT stocks from moving up for quite some time and the fears of further appreciation in the rupee will keep some export companies from performing but may be the appreciating rupee is good for the economy as a whole and the Country is growing richer with appreciating currency. The IT companies will have to live with it and we have seen our markets moving up without the participation of IT in the last quarter.

Crude

The rising prices of crude beyond $75/Bb would start troubling US stock markets as crude prices have an inverse relation with the equity markets. Our markets may not be affected to a large extent as the appreciating rupee will undo the effect of rising crude to some extent as our imports of crude will become cheaper with appreciating currency. However if the US Equity markets are affected there would be an impact on other global markets and our markets will also not remain untouched by it.

Economy

The economy continues to grow well above 8 percent and except the recent low auto sales numbers we have no other negative data indicating not achieving the growth target. The India story is intact and the investments done with a long term view will hold good.

Inflation

The inflation is now under control at around 4 percent level, there should be no negative trigger from this front in the near term.

Interest rates

The interest rates seem to have peaked out and with inflation under control there is no immediate threat of further hike in interest rates which should be good for interest sensitive sectors like Autos, Real Estate, etc.

Liquidity

The liquidity remains good with a lot of Mutual Fund schemes, Insurance companies (with ULIP plans), Foreign investors and HNIs having a lot of cash to put into the markets. The appreciating currency also attracts more foreign investment in to our markets. Also our primary markets have recently gathered a lot of money without affecting the secondary market at all. So liquidity should not be a problem.

Global Markets

There are two types of fears in the US markets, one is the burst of Sub prime Mortgage bubble and other is the risk of bursting of the Chinese bubble. Well, whether these could be called bubbles or an overheated condition is a matter of debate. We are trying to use the popular (easily understood) language. If the weak housing data keeps coming in and the real estate sector in US keeps languishing, it may put a downward pressure on the equity markets and moreover, the Indian housing and real estate market will also be affected as a number of NRIs from the US invest in Indian Real Estate and once there is slump in US real estate they might slow down their Indian investments. You can see the tone of some NRIs in the comments posted in this post.

The Chinese markets are most expensive in the world and in spite of that they have grown in a big way in the last one year. Some international experts believe that it is forming a bubble and is going to burst sooner or later. The Chinese markets are very volatile and if there is any such sharp cut the whole of the Asia will be affected and some global funds might start selling all the Asian markets on appearance of any such trend.