What is fuelling the stock market rally?

Many analysts – specially those who have been caught on the wrong foot – are finding it difficult to explain the reasons behind the current rally in the stock markets. The easiest way out is to say: “It is a liquidity driven rally.” But aren’t all rallies liquidity driven? If buyers didn’t overwhelm sellers, the market would remain stagnant.

If the Sensex falls 1000 points in a week, investors want to know what caused the fall, and whether a bear market has started. Analysts are more than happy to satisfy the curiosity with their considered opinions based on fundamental analysis, or technical studies, or astrological alignments.

If the Sensex rises 1000 points in a week, investors want to know if it is a good time to buy. Analysts jump in to list out their favourite small/mid/large cap ideas that are just the kind of stocks that would provide multibagger returns.

Whatever be the trend of the stock market, investors always have this insatiable need to know why the market is doing what it is doing. As if analysts really know! At best, they may have a reasonably good idea.

French author, critic and journalist Jean-Baptiste Alphonse Karr had made the statement: "Plus ça change, plus c'est la même chose" – which is usually translated as “the more things change, the more they stay the same”. He may just as well have said it about the unnecessary curiosity of stock market investors about the direction of a market index.

In a recent post, a bullish technical chart pattern that has been forming on the Sensex for more than 2 years was explained to justify why the Sensex should touch 25,000. Some readers scoffed at the conclusion. A few wanted to know how soon might the target be achieved.

What was the purpose of writing the post? To partly dispel the overwhelming mood of negativity among many small investors. The high inflation and slow down in economic growth seemed to dampen any enthusiasm to invest money into a ‘risky asset’ like stocks. Gold or bank fixed deposits appeared safer bets.

Inflation-beating returns require judicious and timely investment in stocks – regardless of the level or direction of a stock index. Then, discipline and patience are required to hold on to the stocks for the long-term, without worrying too much about why the stock market is rising or falling.

That was the long answer. The short answer is: “Who cares?”