The Sensex ended the week with a 2% gain. The market started the week on a strong note buoyed by the robust auto sales in July and kept marching ahead throughout the week. The upward trend was cut off by selling pressure on the last trading day. Manufacturing expansion picked up pace in July, a survey showed on Monday.
The HSBC Markit Purchasing Managers' Index, based on a survey of 500 companies, edged up to 57.6 in July from 57.3 in June when it was down from a multi-year high. The factory output index jumped to a four-month high of 62.3 in July from 60.5 in the prior month, pointing to a rate of expansion in production that was above the trend since the end of the financial crisis, according to survey compilers Markit.
RIL has said that it will pay $340 million in cash and $52 million in drilling cost to Carrizo Oil and Gas Inc and its partners for a 60% stake in the Marcellus shale-gas areas of central and northeast Pennsylvania.
Bharti Airtel retained its leading position among telecom service providers and posted a growth of 5% to end the 2009-10 fiscal with revenues of Rs38,800 crore.
During the week, the government passed a Bill to replace the ordinance issued to end the spat between the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) over regulation of Unit-linked Insurance Plans. States opposed a draft bill to amend the Constitution, a measure proposed by the Centre for rolling out GST in its present form as it provides veto power to the Union finance minister in matters relating to State subjects.
India Inc seems to have regained its deal-making appetite with mergers and acquisitions (M&As) so far this year nearing the $50 billion level - already over three times the total for entire 2009. There were M&A deals worth about $16 billion in 2009, down from close to $40 billion in 2008.
In the US, an index of pending home sales fell to a record low in June while consumer spending and personal incomes were flat, raising concerns about the pace of the economic recovery.
Maruti Suzuki, hit by sharp increase in input costs, has decided to pass on part of this cost impact to customers. The price revision on various models ranges between Rs2,000 and Rs7,500.
The Reserve Bank of India (RBI) has said its ability to conduct the monetary policy freely has again come under threat due to the influence of the government's fiscal policies.
Weekly jobless claim data in the US revealed initial claims for jobless benefits rose to 479,000, the highest level since early April.
A medium-term top may be in place
Two weeks ago, I had said that there is a likelihood that the short-term high would now be around 18,300 on the Sensex. I had also said that if the Sensex crosses 18,300, we were in for an extended rally right up to 19,000, driven by global liquidity that would defy all logic. By a strange coincidence, the Sensex hit a high of 18,295 on Thursday, 5th August and started going down.
From a low of 15,960 that it had hit on 25th May, the Sensex has rallied by 2,300 points already. Although the market can always go higher—whether logical or not—it is, indeed, hard for me to see how we can head higher without a longish and substantial correction, as
I said previously. A fortnight ago, I was mildly bullish but cautioned that a downside break may come any day. Over the past few weeks of rally,
I had maintained that the strategy ought to be to buy the declines, not the momentum. And also run fast for the exit because a big decline may happen any moment. This has worked so far but the expiry date of this strategy probably was 5th August.
In our previous issue, we had become neutral in our medium-term outlook. Now, it is time to sell. The market may go up further but prudence dictates that you book your profits now. If the market corrects, you can buy quality stocks for the medium term again. If it does go up, risk would have only increased for meagre returns.
One of the key reasons to sell for the medium term is that the market has become overvalued. In all the hype and hoopla about strong economic growth, what is often missed is the fact that economic growth may not automatically translate into higher stock prices and returns for you. In your journey with stocks, where you will end up depends on where you start. If you start when stocks have already run ahead, you won’t make great returns. That is the stage we are at now.
In fact, what we are witnessing currently is a combination of high expectation, high valuation and low growth. Yes, you read it right, low growth. As regular visitors to our website www.moneylife.in know, we have published a few articles recently that show aggregate corporate results for the June quarter in a new light. It may surprise a lot of people that the results were rather poor. Sales growth was in double-digits but there was hardly any operating profit growth which is what primarily translates into net profit growth. If operating growth does not pick up in the next few quarters, the much-dreamt 26% net profit growth that the entire market is expecting for FY10-11 will be elusive. If so, there will be disappointment. And high valuation and earnings disappointment are a deadly combination.
The market has been very placid for two months now. Low volatility period is always followed by a period of high volatility. So, fasten your seatbelts against some major surprises
India VIX, a volatility index based on the index option prices of Nifty index has collapsed to its lowest level since March 2009, from when the data is available. Market players are assuming that volatility will remain low and the market will continue to be range-bound but the current low volatility may only presage a big surprise (positive or negative) in the coming weeks.
The daily VIX hit its lowest close of 17 on 9th August in these 17 months. The index was around 25-30 on most days in the first two months of the year. The 50-share Nifty had hit 5,367 on 21st June and has moved in a narrow trading range since then. It fell to 5,225 on 2nd July and rose to 5,492 on 9th August and is at around 5,400 at the time of writing this piece. This has been an extremely tight trading band for an extended period of time. As a result VIX, the measure of volatility, is sharply down. How should we interpret this, since low volatility period is invariably followed by a high volatility period?
"Low volatility can have two meanings. One is that the market is becoming very complacent and to that extent people are not expecting wild swings on either side. Therefore, volatility is reducing. People are not taking the market risk into account. The second reason could be that we are in the middle of a new long bull market. Typically, when a long bull market starts, the volatility subsides and remains low for a prolonged period of time. This is what has happened in two bull markets. We could be entering that phase now. As that happens, we could see steady upward move in the market intertwined by corrective phases, like what happened in May 2004, 2006 and 2007," said Sandip Sabharwal, CEO - Portfolio Management Services, Prabhudas Lilladher Pvt Ltd. If Mr Sabharwal is right, the low volatility will be resolved by extreme downside volatility as happened in May-June 2006, before the market resumes its upward journey.
"The market is at an indecisive phase and therefore it is in a narrow range with low volatility. If the market starts correcting you will see more volatility. The market is waiting for some correction," said a Mumbai-based head of an institutional equity firm.
The highest daily VIX was on 19 May 2009 (it hit 56.07), following the decisive victory of the Congress party in the 2009 elections. VIX then slipped to its lowest level on 9 August 2010 to 17. "Lower volatility is associated with stability. The markets are not expecting any huge moves and generally huge moves are associated with falls and not the increments. The volatility aspect is very closely watched but you don't know how low is low," said a Mumbai-based analyst. Jintendra Panda, senior vice president & business associate, Motilal Oswal Financial Services Ltd observes that volatility will remain low in the near-term. "Over the last 6-8 months, the market has consolidated within a small range after an upturn in 2009. The volatility is expected to remain low for the next one or two quarters."
Indian markets, like all emerging markets, are supposed to be more volatile than US markets. But the Indian market has been so placid that it is less volatile than the broad market index, S&P 500 whose volatility index now is around 22 now. On 24 October 2008, fears of a financial meltdown sent the VIX to a historic high of 89.53.
While traders are unhappy that volatility has collapsed and that there are lot of tiny whipsaws now which are inflicting losses, Deena Mehta, MD of Asit C Mehta Investment Intermediates Ltd says that low volatility is good for long-term investors who should not take cues from short-term volatile movements.
"It's good for investors as they will not be in for shocks and surprises. Too high volatility is not considered to be good. Low volatility is good for people who have a long-term view on the market. If you have a long-term view then you are not bothered about short-term shocks. People who have a short-term view of 15-30 days are not happy with low volatility as there are fewer opportunities to enter and exit in the market."