From a low of about 8,000 in early March, the Sensex has almost doubled. There seem to be no clouds on the horizon for the markets. Marketmen are looking forward to a Sensex level of 17,000 and beyond. But then, this has been the expectation for quite a while now. Look closer. The Sensex had hit 15,600 on 12th June. At the time of writing this piece, it was below 15,400. Over the past three months, the market has not gone anywhere. The Sensex hit a low of 13,200 in July after the Union Budget and immediately shot up to around 16,000. But, on a weekly basis, the market has moved sideways for a long time. It is not the nature of the market to stay in a range for long. It is waiting for a big event to push it decisively towards one side. I am inclined to expect a decline rather than a fresh rally. Only time will tell us about the extent of the decline. As of now, it seems like a small dip of about 10% or so.
There are several reasons for a decline now. One, all the ‘good news’ is already factored into the price. The June quarter results were excellent. We know that almost all the sectors are doing well now—including the long-suffering commercial vehicles segment. Companies in the software sector should have suffered the most. After all, their fortunes are directly linked to the US which was in deep distress. But software companies have done well through the most difficult period. What further proof do the bulls need?
On the negative side, we are not sure of the actual impact of the monsoon, the shape of government finances and, as a result, which way interest rates would move. The market is often blindsided by economic issues, not so much by corporate ones. The biggest worry is that the US markets are headed for a major decline.
As we have mentioned in the section Straws in the Wind (page 18), bullish sentiment is too high and insiders are selling in droves (buyer to seller ratio was 31:1 in August compared to a normal of 7:1). The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March. For example, short interest on NYSE stocks plummeted 10.3% in the second half of July and margin debt on all US listed stocks spiked 5.9% in July. “When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock,” said Charles Biderman, CEO of TrimTabs. “Investors who think the US economy is recovering are going to get a big shock this fall,” he said and further that “Companies and corporate insiders are signalling that the economy is in much worse shape than conventional wisdom believes.” Meanwhile, financial journalist and neuro-economist, Jason Zweig, wrote in the Wall Street Journal, ‘Don’t be happy, worry’, quoting the same TrimTabs data. “The market’s light has turned yellow. Don’t try to run it.”
If they are right, the US market will sneeze any day now and the rest of the world will catch a cold. That would be a great time to pick up the stocks (mostly small- and mid-cap) that we recommend from time to time. (Feedback at [email protected])