The Hindu Business Line : Sentiment turns bearish

As there is no visible sign of panic, but only a tactical readjustment of positions, this week the Dalal Street is likely to witness a war of nerves.

FROM the point of view of trading mechanics, the stock market has entered into an overall selling mode in the short term.

The sliding rupee against dollar provided one of the main reasons for selling. The overseas funds have been selling in the net. The local mutual funds also did not provide much buying support.

For large number of big players, profit taking or retreating to the sidelines was the best option as the market P/E seemed to indicate little overvaluation in absence of any fresh growth trigger in the near future. The bears have also used the psychological opportunity to the hilt.

This week, the general outlook appears downbeat as bears may try tightening their grip over the market. But a few things may run counter to the continuation of a large-scale selling.

The RBI intervention in the currency market against falling rupee may alter the scenario.

Although falling rupee against dollar may have induced the FIIs to sell and pump money out of India, there is an inbuilt limit to it. In fact, the net outflow through portfolio investment money is considered one of the primary reasons for the recent slide of the rupee. If a steady outflow continues, theoretically rupee is likely to fall further. This in turn may not be a profitable proposition for continuation of a pump-out by FIIs as the average return would tend to fall.

It is understood that among the overseas funds, hedge funds have been topping the sellers list to maintain their return profile and target.

If the fall in rupee is arrested and currency market sends signals of resistance, the hedge funds would be forced to change stance so they are not caught on the wrong foot in their over enthusiasm to meet the return expectations.

On the other hand, after a substantial fall in benchmark indices in two straight sessions last week, the stock market overvaluation factor seems to have lost some of its underlining emphasis. Further selling, if continues, is likely to attract long-term buyers as the long-term fundamentals of the market, the economy and corporate growth assumptions have not undergone any dramatic change.

As there is no visible sign of panic, but only a tactical readjustment of positions, this week the Dalal Street is likely to witness a war of nerves.

Who would blink first - bulls or bears? In the ensuing tug of war, the continuation of volatility is a strong possibility.

Would the trouble at Refco of US, which is present in the local market, have an impact on the overseas investment trend here? An early regulatory move may only be able to clear the air of apprehensions that has surfaced.

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