Things HAVE changed

Things have changed - Analysis of Stock Market Movement, which has given anxious days and sleepless nights for lots of people

Courtesy - Udayan Mukherjee (CNBC)

A lot has changed in the last fortnight. A lot. We have seen an election result that has surprised virtually everyone, global risks have mounted and the market has moved in a manner that has left everyone speechless and many shirtless. A rethink is required. A cool, mature, collected rethink; not an immature kneejerk that we have seen plenty of recently, nor sweeping statements from analysts who swing from bull to bear markets in the matter of weeks.

Let's start with the basics. Is this still a bull market? Time will tell, but for me, structurally and fundamentally, it is still one. And no, this is not based on technical levels or me wearing green eye shades and being in denial. The fundamentals of this bull run rested on a few key things. Strong corporate earnings, robust economic growth, reasonable valuations and growing global investor confidence in the India story. The first three remain as firm as ever, the fourth may have been temporarily clouded, but my belief is that it will clear out. However, the new global risks are very important, and they may stall and slow the smooth and "speedy" progression of this bull run. And in this, may lie the utter discomfort of many traders. Is this a market that will move as easily to 6000 again and then 7000 and then 8000 as every analyst had projected earlier using the "dangerous" law of extrapolation? The answer is No. If the definition of a bull run for you is the index constantly and continuously scaling new peaks and delivering multibaggers every six months, then it certainly is over. If it is not, read on.

Three things, as you well know, matter most in shaping markets. Value, liquidity and sentiment. The last two are often closely related. In the short term, the last two are supreme. However, over a longer time frame, liquidity usually comes around to chase the first and most important parameter: Value. And then sentiment follows. We have seen all this play out in the last 15 months. Both ways, up and down. So if you are a short term trader, life is fraught with great risks in the next few months. Because the situation is rather complex. Let me elaborate.

You see the problem, don't you? It's just that a confluence of risks have suddenly clouded what seemed like clear skies for global equities even a few months back. As an investor, you have to recognise and rate these risks and not bury your head under sand and say "the Sensex is going to 8000". What works in financial markets is realism, not optimism or cynicism. That's why the cool head.

So does it mean that there could be sharp corrections. Sure . But everytime there is a crash like Monday, should you throw your hands up and say the market is finished? No, quite the contrary.

But the important thing to focus on now is, how do you factor all this in to your investment world. You have to react, because things have changed. Two things: One, you have to relook at your "portfolio" and two, you need to "price" these risks in. Take a cue from the market at large. It has been trying to do just that. It has hammered oil PSU stocks down, for obvious reasons, and it has quickly scaled down from a Sensex mean of 5500 to 5000. That 10% adjustment is simply the market telling you: Risks have heightened, and the prices need to factor that in. That's efficiency.

Just one quick word on politics. I kept it for last, intentionally. Because while today it seems to be the most important factor influencing prices, I think it will cease to be so by the second half of the year. Most people won't agree with me. But the sharp reaction from the mkt is more on account of the "surprise" that the results have thrown up. That will cool off. Over a period of time, the market will come to terms with the fact that while a few disinvestments will not happen and a few populist measures will bloat the fiscal efficit "marginally" , the story will continue. India will carry on growing, and beyond what the market has already priced in there won't by too many nasty surprises.

To come back to the point I started with, a lot has changed. While I continue to believe that the bull run will not end till the earnings or value parameters confirm it; there could be pain in the near term. The market could stagnate, even drift down. It will test your conviction, certainly your patience. Maybe it's time to make that shift, from being the leveraged trader to the cautious investor. Monday's crash may have signalled the end of many a leveraged trader. If you have survived, fasten your belt for another kind of a bull market. A longer, slower run with "bear phases" thrown in. It's like a marriage. The honeymoon is over, now for the long haul.