The Hindu Business Line : Bulls on the rampage

Trying to ride the uptrend in a long list of stocks of companies with dicey credentials carries high risk. Exit option in most of the 1,200 stocks that have resurfaced on the trading list of the BSE has to be actively considered.

TRADING patterns over the past couple of weeks point to the need for investors being extra cautious, as the bull market gets stretched out. Obscure stocks, that rarely find takers except when there is a very strong bull run, are having a field day. For instance, trading last Wednesday came to a halt when about 500 stocks hit the upper circuit-breaker on the Bombay Stock Exchange (BSE).

But not one was of a large-cap company or from theBSE`A' group — made up of 200 stocks of mostly well-known companies and accounting for about 80 per cent of the exchange's turnover. Those that hit the upper circuit-breaker were predominantly from the B2 group, the trade-to-trade segment (a market where buy and sell positions have to be closed out separately every day) and the Z group, comprising stocks categorised as high-risk by the BSE.

The participation of such stocks in a rally usually happens at the latter stages of a bull market. Typically, as market players exhaust quality options, they move down the pecking order to seek opportunities for trading gains. Investors who had also missed out on the initial bullish phase see the low-priced stocks as a vehicle to make a buck. While the market players rarely get caught, as they exit when there is still momentum, often, it is the late entrants who end up with worthless pieces of paper.

This trend was evident even in 1992 and 2000 when the bull market was driven by massive sums sourced from the banking system by Harshad Mehta and Ketan Parekh respectively. In 1994-95, even as the market slowed, the prices of a horde of non-banking finance company stocks rose steeply, in stark contrast.

This is now happening in stocks from the steel, textiles, chemicals and auto-ancillaries sectors. That these sectors have remained out of fancy for over five years has made it easy to spin tales of turnaround and impressive growth prospects and positive aspects of their business models that have, for long, remained in the closet.

But much of this information often has little credibility, though they serve the purpose of those who want to create a market in such stocks, bale out ahead of the rest, and make a tidy sum. Rumours and word-of-mouth publicity tend to drive the uptrend in these stocks.

Ramping up such stocks has become easier now than in the past because:

The improvement in communication facilities, the Internet and SMS have become handy to spread rumours of spike in prices;

Investment-oriented Web sites, whose recommendations also cover potential multi-baggers from the ranks of obscure stocks with dicey credentials;

The presence of a geographically spread out trading platform on the NSE and the BSE;

Companies' own efforts by using various media to plant stories of big orders from global outfits (for instance, a number of stocks are now riding on rumours of orders from Wal-Mart of the US), outsourcing opportunities and investment interest by institutional investors; and

The ease of putting through transactions in an electronic and settlement system, which has made it easy to ramp up such stocks with volumes that tend to spurt suddenly to levels rarely witnessed in the past.

The phenomenon is pronounced on the BSE that has about 9,000 listed stocks, of which some 2,300 are actively traded; till eight months ago, active trading was confined to about 1,100 stocks.

The high degree of interest in these stocks does not mean that an end to the bull market is at hand. A correction is over-due, and its magnitude may get more pronounced with time lapse. But large-cap stocks and a number of mid-cap stocks do offer scope for gains after taking the corrective phase in their stride, unless the economic growth story collapses. Investors may be better off focusing on such stocks with growth potential as well as select small-cap stocks.

Trying to ride the uptrend in a long list of stocks of companies with dubious background carries a high degree of risk. The exit option in most of the 1,200 stocks that have resurfaced on the trading list of the BSE has to be actively considered. Investment in such stocks is best avoided. But for those with a high-risk appetite, the ability to absorb huge losses and enjoy the thrills of trading in such stocks, it is a different story; still one must hope that the roller-coaster ride does not leave a dent in the wallet.

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