The Hindu Business Line : Clouds of negatives darken sentiment

THE domestic stock market has become so used to the daily dose of a million dollar overseas inflow that the valuations strangely depend on liquidity and not the other way round.

If the perception of key indices (and their basket of stocks) is in direct proportion to FII outflow or inflow, the sentiment and liquidity indicator for thousands of other listed stocks is shaped up by guiding trends in the benchmarks.

Fatal attraction: Last week exemplified this inbuilt vulnerability of the market. Slight net outflow or drop in buying on a given day by FIIs sent the markets into a tizzy. What is disturbing is that a large section of domestic players has developed a knack for looking at FII flow and then take call on the valuations.

This week a number of negatives are stacked up against the forward movement. The huge overhang of open interest in the F&O market and uptrend in global crude oil prices are enough to sour the sentiment.

Among the other negative developments that are likely to unfold include increase in the domestic petroleum prices, probable US Fed rate hike and the Maharashtra Government proposal for bringing proprietary stock trading under stamp duty cover.

The FII selling in the derivatives last week has already raised an alarm. In mid-cap stocks, leveraged positions have started getting margin calls. In this situation, sustainability of the higher valuation in terms of P/E multiples for the stocks beyond the Sensex and Nifty were put under instant scanning.

As the possibility of a sharp correction enhances, sellers outnumbers buyers. Corporates, brokers and operators have begun to exit. This may prompt panic selling, particularly from the retail investors, who have entered at higher levels and can ill-afford the shocks.

The small- and the mid-cap stocks are likely to bear the brunt of a serious market correction this week, which may extend to the next week. Fancy valuation or so-called growth discounting and the value discoveries may come to an abrupt halt and are unlikely to resume in April.

By then, current negatives would be factored in and a fresh look at fundamentals and annual numbers could indicate the way forward. However, the possible dip also provides opportunities for a contrarian play.

Many would watch the moves of the domestic MFs, which have garnered substantial funds in the recent past. If severe redemption pressure does not occur, then it may prove to be an opportune moment for long-term investment for them.

Temperament in the time of trial: A dispassionate view at this juncture could be one of a consolidation, a necessary breather after a strong and fairly sustained run-up. But, it is difficult to put up a stoic stance in the middle of the carnage, if one is not predisposed to a situation like this. Slide hurts; panic hurts even more.

If one agrees to a particular valuation, the market calls into question the conviction behind that in a consolidation phase. This indicates that the risk appetite and return perspective in terms of a specific timeframe determines the investment action.

The retail investors may have to go through a test of fire in the next few weeks as the overall market price discovery mechanism passes through twists and turns.

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