Tuesday, September 28, 2010

Sensex at 20000 – why isn’t the index moving up?

As I have mentioned before, 20000 is a nice round number and the Sensex has reached that level after 32 months. It is almost like a person completely focussed on climbing up a mountain who reaches a ledge within handshaking distance of the peak. He pauses to catch his breath and then looks around to see the view below, before attempting the final climb to the top.

Many investors who joined the bull market late in 2007, or started buying too soon in early 2008, are elated that they are getting back their ‘buy’ price and selling out. Not realising that the market is unaware of their ‘buy’ price. Others are following the ‘what goes up-must come down’ theory and booking profits to conserve cash for buying the correction that ‘has to come’.

What happens if there is no correction any time soon? It is possible that the Sensex continues to move up till it tests, or even surpasses, the all-time high of 21200. That could take a while if the FIIs decide to wait for the Q2 results in Oct ‘10.

It is also possible that the correction has begun already. The Sensex is still making higher tops and bottoms, but the upward momentum has slowed down. Or, it may be just a period of consolidation – the pause before the final assault.

Is this 20000 Sensex level different from the previous 20000 in Jan ‘08? If you look at it from investor-emotion point of view, there was more greed in Jan ‘08. If you look at it from the macroeconomic point of view, the western economies were already reeling from the effects of the subprime mortgage collapse in Jan ‘08. Their anaemic recoveries are just about starting in Sep ‘10. The recovery may take longer than expected, but the cycle is nearer to the bottom. It was closer to the top in Jan ‘08.

What about the situation in India? The interest rates were higher; so were the commodity prices in Jan ‘08. In Sep ‘10, interest rates and commodity prices have started to move up, but they haven’t yet reached levels that could cause a trend reversal. There are no Communists retarding the decision-making in Delhi. Not that it has helped policy reforms a whole lot!

On balance, the situation calls for more bullishness now than we see all around us. May be the debacle of 2008 is too fresh in investor minds. As I have mentioned often, it is better to be cautious near an all-time high.

The economic situation may not warrant a huge correction, but a ‘black swan’ event might. May be the Israelis decide to take a pot-shot at the Iranian nuclear reactor. Could be that Pakistan launches another terrorist attack on India. Who knows? These things happen out of the blue.

Stick to your asset allocation plan. Book partial profits and move cash to bank fixed deposits or balanced mutual funds or index funds. Start, or continue with, monthly SIPs. Wait for better opportunities to buy in lump sum. No need to worry about what may or may not happen to the Sensex.

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