From here to where??

Analysts (mostly Technical) have given numerous reasons to explain the ongoing turmoil and volatility in the market. Interestingly, when SENSEX touched 21K level all of them narrated the same story – Indian growth story. Now they have all the things to blame – from recession in US to the Budget, from FIIs to week global cues. Apparently they are unable to understand the market.

FIIs have been blamed enough. But the empirical evidence is on the contrary, Choe and others (“Do foreign investors destabilize stock markets” -1998) studied before and after Asian Crisis of 1997 and found no evidence of stock price movement caused by FIIs withdrawal in Korea. However, Tanushree Mazumdar in his work (FII inflows to India: their effect on stock market liquidity and volatility-2004) found that liquidity has increased from the time Indian stock markets were opened to FII inflows. He further concluded that the inflows have not caused much turbulence in the market and the relationship between FII flows and volatility were found to be quite poor. Statistically, there is no evidence that volatility in market is related to FIIs activities. In fact, in the times of market crashes, FIIs were mostly net buyers. During the Asian financial crisis of 1997, FIIs were the net buyers. During the scam and crash of November 2001, when SENSEX hit 3800, FIIs were again the net buyers. In March 2002, when SENSEX touched 3807, FIIs investment was net Rs.2204.8cr. During the Nuclear test of 1998, FII s outgo was mere Rs.557 cr. in May and Rs.896 cr. in June. Historical data suggests that the domestic players were large net sellers in the all the above situations.

Budget were not that bad – apart from the 60,000 crore of the debt waiver - which was obviously a good politics (bad economics?).

Technical analysts are suggesting that SENSEX may touch 12K level. I was reading one such report and the analyst claimed that market discounts everything well in advance. So I tried to guess what market is trying to discount – an early election and a hung assembly. Perhaps!

Liquidity crunch is of course a reason – but obviously you can’t explain the volatility alone by this logic. I believe investors’ perception is the main reason for this volatility. I talked to many of my friends who invest/trade in the market. Most of them believe that market will fall to 12K level. But all of them are planning to put big money in the market at that level. They also hope that by next year June-July the SENSEX will touch 30K level. I also observed a profit booking tendency among all of them. Whenever market touches a new level they buy but sell them even at a small rise. Somewhere they believe that market can’t sustain at a higher level currently – all of them gave the same reason – the recession in the US.

Obviously you can’t predict the market – and you should not. You don’t need to predict the market to be a intelligent investor.