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Tuesday, Feb 26, 2002

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Is market headed for correction?

BL Research Bureau

SINCE mid-September 2001, the BSE Sensitive Index has notched a gain of about 40 per cent to close around 3,613 points on Monday. The rise in the Sensex has come amidst disappointing news about the economy, political turmoil and stray positive developments such as successful public sector unit (PSU) divestments — hardly a combination to trigger a rally.

If there is a single factor that has underpinned the rally, it is the sharp rise in daily average turnover over the last six months. The turnover data for February, however, indicates a drop in the daily average, thereby raising the question: is the current rally coming to an end?

Between May 2001 and mid September 2001, the BSE Sensex had lost about 30 per cent to hover around 2,600 points. The political turmoil that followed was hardly encouraging for the bellwether technology stocks that depend heavily on the economic condition of the US. In addition, anaemic industrial growth should have compounded the situation.

Conventional wisdom was turned on its head, and around that time, the daily average turnover on the BSE began to increase. In August 2001, the BSE registered a daily average turnover of Rs 883 crore. The next month, it was Rs 1,080 crore, and so it went on till the daily average turnover touched Rs 1,703 crore in January 2002.

The increase in daily average turnover was accompanied by a rally in equities. On the surface, there seems to have been a link between the growing interest in equities and the rally. For instance, the Sensex increased from about 2,600 points in September 2001 to about 3,220 points in mid November 2001. Over the next two months, the Sensex inched up by another 200 points, and finally, climbed to 3,634 points on February 18.

In February, however, the average daily turnover dipped by about 17 per cent to Rs 1,406 crore. The dip in daily average comes on the eve of the presentation of the Budget, an event that can have a huge bearing on market movement in the near future.

If the dip in average daily turnover in February is not an aberration, and an indicator of a decline in interest in equities, is the market headed for a correction?

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