The Hindu Business Line : Sensex at 18K

The market barometer Sensex conquered the 18000-peak on Tuesday in an awesome display of power and speed. As the front-line stocks lead the markets higher, there are ample signals that investors ought to exercise caution at this stage.

The turnover on the bourses has been surging over the last couple of weeks. The average cash turnover on the National Stock Exchange in October has been almost 50 per cent more than the average recorded in September.

Increased volumes imply a surge in investor optimism and an influx of new investors into the markets. Such behaviour is commonly noticed prior to a peak.

Speeding Ahead

The increased activity in single stock futures in the derivative segment and the surging open interest (above Rs 85,000 crore) is another indication that investors are betting that the rally will continue.

Increase in leveraged speculative positions, especially while the market is speeding ahead is lethal as the stampede to exit these positions only results in widening the losses once the rally ends.

Another reason why investors need to be wary is because the recovery from the August correction has been largely fuelled by FII inflows.

A large portion of these flows can be short-term in nature as external investors too display a herd-like behaviour as far as their portfolio allocations are concerned.

Our markets are therefore highly vulnerable and can face a sharp about turn if and when these flows reverse.

Though the current momentum can drive the Sensex higher from these levels, it is imperative that investors should not indulge in speculative trades in such a market as the risk-reward ratio appears highly unfavourable at this point.

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