The Hindu Business Line : Further correction likely on profit-taking

This week, after removal of uncertainty over early general elections, the market is on the threshold of a new phase. The market players are reading it as return of politics for development and reforms in the coming months.

THE stock market is currently liquidity driven. Thus, for many in the market, if the fundamentals take a backseat and the key indices move up, it is justifiable. As an extension of this hypothesis, substantial correction, caused by profit-taking, is also perfectly in order. The underlying idea is to give the impression that the bullish undertone of the market is intact.

Last week, Sensex, the benchmark index, closed well above the 5000 points mark. As long as a healthy money flow into the system continues, the justification for revaluation will remain appealing, but not the other way round.

The interesting factor is that over the last few weeks, retail participation has been increasing. Talking to a number of corporate investors, high net worth individuals, mutual fund managers and small investors as also so-called private portfolio managers (read as not registered with SEBI) in different metros, one gets the feeling that away from an increasing hype over the "feel-good factor", retail money flow into the market is quite handsomely evident now.

After all, only 10 per cent of the total domestic market capitalisation belongs to the overseas fund investors.

This time round, however, it seems that the retail stream is quite guarded and organised. The risk appetite is not disproportionate to the depth of their pockets. They have also shown their inclination for both buying and selling. This appears to mark a departure from simple manifestation of herd mentality in the past. But this is only a beginning.

In the earlier two big rallies, led by late Harshad Mehta and Mr Ketan Parekh, the retail investors in their frenzy did not care for fundamentals, in spite of unrealistic valuations. Thus far in the current rally, the trend has been to question almost every valuation proposed or suggestions put forward for factoring in future growth. However, unscrupulous operators, as always, are not restrained. There are question marks over the current valuation in many a small and large cap stocks. Rumour mills are back in action: flow of unconfirmed news in the market circles indicates preparation for a hysteria is well under way.

Answers to the three key questions, such as, how strong the good monsoon will influence rural consumption, will the road blocks to the infrastructure projects, particularly roads and power, be removed, and how swiftly the Union Government can resolve the dilemma over the disinvestments process, will determine the market behaviour in the coming weeks.

The last couple of weeks have seen some new FIIs joining the India bandwagon. It is understood that these investors are looking primarily at the index heavyweights such as top rung tech and FMCG majors as also a petrochem major. The seasoned market players are watching the new breed closely because their behaviour may influence the movement in key indices in the short term.

This week, while the old FIIs are expected to look farther into the second rung sectoral stocks, the local market makers are likely to increase their grip over the mid cap counters. Friday's substantial correction in the Sensex and the Nifty is a reminder of one simple lesson - valuation in the market place is always relative and subjective; and today's explanations can be used as tomorrows excuses in the reverse.

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