Equity street's state last week reminded this writer of Ernest Hemingway's two axiomatic sentences: “The past is never dead. It's not even past.” ( The Snows of Mt. Kilimanjaro )

It seems difficult for bull operators to behave as if there was no yesterday, and tomorrow is rosy. But they have yielded only partially to the pressure of foreign institutional investor withdrawal. This week they would continue to resist a correction in their propped up valuations and, perhaps, yield a little more ground.

It is not the losing stocks in their basket, such as Reliance Industries and Reliance Communication, or sectors such as realty, banking and industrials, which are making them weak-kneed; the prospect of money flow drying out, as the global context changes in the short term, is forcing them to step back.

According to market intelligence, the short-only overseas players entrenched here are timing their profit booking ahead of the end of quantitative easing (QE2) or the US Federal Reserves' bond buying programme.

For some of these global investors, issues such as inflation and corporate earnings growth are secondary to their short-term returns.

Local operators have been banking on them. Substantial selling spree by the foreign institutional investors last week is unlikely to turn into a buying binge in a short while until there is a substantial correction.

The chart-following traders, however, encountered discomfort on Friday. The Nifty, which had been trading in a range between 5945 and 5693 for the past two weeks, gave uneasy signals – negative market breadth coupled with lower tops and lower bottoms in hourly chart on the last session.

According to Sharekhan's technical analysis, the key index before the close though took support at 5706 and bounced back, the hourly momentum indicators gave a negative crossover and traded below the zero line.

But the long-term players, who have been circumspect in the recent rally, are watchful of economic and corporate fundamentals including the policy review this week by the RBI or progress of the cases involving corporate corruption.

According to Morgan Stanley's London-based economist, Mr Manoj Pradhan: “There's nothing more effective in getting the market to focus on EM (emerging market) inflation than an upside surprise in Chinese inflation and an immediate policy response...China's CPI inflation printed at 5.4 per cent and was followed rapidly by a 50 basis point hike in the RRR. An upside inflation surprise from India helped to widen the discussion to EM inflation and the policy response in general. While inflation in a large part of the EM world is poised to peak around the middle of the year on a year-on-year basis thanks to strong base effects, what level it will peak at and how quickly it will fall will be significant in determining the policy response from EM central banks. In other words, central banks are likely to pay close attention to the sequential change in inflation after stripping out base effects.”

Local long-term investors have read the indications of a difficult phase ahead for corporate profit growth and have been cautious.

A Crisil study predicted that the weighted average revenue growth of companies will be maintained at a healthy 18 per cent in 2011-12. It, however, said that key elements for monitoring would be inflationary pressure and consequent upward interest rate movement, currency devaluation, significant volatility in crude oil, metal and coal prices and the Government policy on pricing fuels, fertilisers, environmental clearances and regulatory changes.

>jayanta_mallick @thehindu.co.in

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