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Tuesday, January 11, 2011

5 Convoluted reasons why the Sensex is falling

The Sensex is falling! The Sensex is falling! Six days in a row – no less! Already the pink papers are writing about how many lakh crores of investor money has disappeared into thin air. At the beginning of 2011, every one was talking about new highs. 11 days into 2011, and now the focus is on down side targets.

Why has the Sensex suddenly started falling? Here are 5 convoluted reasons:

1. Food inflation is going up. Look at the prices of vegetables! They are supposed to go down in winter, when supply is plentiful and wastage is less. ‘Base effect’ was supposed to kick in. The late rains caused havoc. Some jiggery-pokery is going on with onion distribution. But food inflation remained high throughout 2010, and the Sensex went up.

2. It is not food inflation then. So it must be the interest rates. To tackle inflation, the RBI has been increasing interest rates. Now the banks have started offering higher rates on fixed deposits. That means borrowing costs are also increasing. So people who borrow money to invest in the market have to pay more. They must have scaled down their borrowing. But RBI raised rates in 2010. Why is the Sensex falling now? Is it in anticipation of another interest rate hike?

3. It must have been the FPOs and IPOs, which sucked out large amounts of cash that would have otherwise been invested in the secondary market. See the massive amount that the Coal India IPO garnered. A totally corrupt and inept management, digging out poor quality coal that burns holes in boiler tubes, managed to sell a dream of great future growth and sold a lemon to the public. The newspapers made a big song and dance about employees not touching their allotted quota because of ‘foolish’ advice from their unions. Looks like they were the smart ones.

4. Could be the series of scams that came out of the woodwork? The Commonwealth Games scam, the Adarsh Housing scam, the telecom 2G scam, the realty finance scam, the mining scam, and god-knows-what-other scams. But all those scams were unearthed last year. The FIIs know about such risks in emerging markets. Otherwise, why would they invest in Indonesia – which is far more corrupt than India?

5. A-ha! So it is the FII selling that has triggered the sudden fall. But the FII selling has been matched by DII buying. The Sensex should have moved sideways instead of dropping like a stone. May be the FIIs are selling the Sensex 30 stocks and the DIIs are buying stocks other than the Sensex constituents. Then why are small and mid-caps also falling?

If small investors are feeling even more confused after reading those reasons, then don’t blame me. I did mention that the reasons are convoluted!

Forget about the reasons. Look at this correction as an opportunity to invest in some fundamentally strong stocks that have been beaten down. Remember Warren Buffett’s well-known secret about stock market success: Be greedy when others are fearful, and be fearful when others are greedy.

Related Post

The Sensex and Nifty are correcting: is it a buying opportunity?


jawaharlal bansal said...

In my view,it is flight of smartmoney.Smart money is more smart than any one else.

Nasir Khambatta said...

Another original piece, Subhankar. Well-thought.

Eswar Santhosh said...

I seem to be missing a lot of fun these days - postmortem analysis of daily index movements, heated arguments over where Index is headed next etc., For an 'outsider' like me, this fall was due. And like every correction, it never came when everybody said it would, but when people least expected it.

Anonymous said...

Hello Sir,

This is why, I LOVE this blog...


Subhankar said...

@jb: Not a sign of 'flight' yet, Dr B. Just routine profit booking and re-deployment. When the Sensex touches 25000 (which it is quite likely to do over the next 2 years), the DIIs will seem smart for buying at 19000 when the FIIs were selling!

@Nasir: Thanks. Just an effort to inject a bit of levity after 6 days of correction.

@Eswar: The index has been correcting for more than 2 months now (since the top of Nov 5 '10). An impending test of the 200 day EMA should determine if we are going to face a deeper correction.

The Aug '10 top of 18500 and the 200 day EMA level of 18800 are support levels. The next support is at the Apr '10 top 0f 18000. We'll watch those levels closely.

@Titu: Appreciate the feedback. Didn't feel like doing a 'serious' analysis last evening.