Investing after golden monday

The election verdict in India was totally unexpected. yes the exit polls were predicting a slender lead for UPA. But none expected them to get anywhere within striking distance of a majority. This was the ultimate gamechanger in market history, long after the verdict of 1991 where the P.V.Narasimha Rao govt won absolute majority and intitiated the first generation reforms under the able guidance of Mr.Manmohan Singh through the New Industrial Policy. The times that we are living in are so gloomy that this sort of a positive news has changed market sentiment overnight and can be judged to a large extent as putting us on the right path to get out of the bear market far earlier than expected. There is almost conviction amongst market participants that the lows of Oct 2008 will not be revisited even under highly stressful or catastrophic global events. The markets reacted with such high euphoria that we opened gap up on Monday morning with the sensex rising more than 2000 points and market operations halted for the rest of the day due to circuit filters getting breached. The velocity of this rally has taken the entire investing world by surprise with its speed and tearing momentum. The markets crossed 9000 on 23rd March 2009 breaking out of a channel formation and it was expected that the same would be a bullish reversal. Most of the auto, banking and interest rate sensitive stocks broke out of their respective patterns around this time, but none of us prognosticators expected the market to break above the 200 day moving average of 11000. The markets too faced a strong resistance at these levels and struggled throughout April consolidating around the moving average levels. I guess the fact that the market broke out from 9000 levels was the first opportunity for long only investors to get into the market and for the naysayers one more chance went abegging once the moving average levels were surpassed towards April end. Now where do we stand..Most of us have missed an entire 50% ride from the lows to 15000 given the pessimism (justified to an extent) and skepticism with which we viewed the surge and dismissed the same as a mere bear market rally. Yes, this might well still remain a bear market rally disguised as a new bull market. The rally was the result of extreme pessimism and disbelief amongst investors. The more and more analysts kept predicting doomsday scenarios predicting a 3 year bear market with further lows at 6000, investors were filled with negativity and their eyes could not see the opportunity that was presenting itself with stocks quoting at unbelievably cheap prices far lower than replacement costs or even cash value. Examples i can think of are Sesa Goa, Neyveli lignite, opto circuits etc. As investors saw markets rising from 8000 to 9000 and then 11000, they were just hoping for a correction to buy on dips and markets refused them the chance to do the same. The veering trend we witnessed from the lows of the satyam saga just kept pushing the market to consistently higher levels and then the masterstroke in the form of UPA poll verdict. Now investors are smarting from the lost quarter. Mutual funds that were sitting on huge cash and thumbsucking all these months are facing difficult queries from investors about their underperformance. This rally which initially started of from 8000 as a liquidity fuelled rally from anglo saxon FII's was a reversal of risk aversion to a partial extent given the positive greenshoots and stimulus packages from various governments of the world in what was seen as a coordinated effort to restore the financial world and prevent a systemic crisis that might result in a debt deflation for the main economy. Throughout 2008 and early 2009, money was flowing into US treasury bonds for safety and reflected the risk aversion displayed by market participants. With stimulus packages being doled out dime a dozen and banks/financial institutions awash with liquidity, money had to chase profitable performance. Parking all the money in US bonds was only going to yield sub optimal returns. With Obama coming to power in the US and the new treasury secretary Geithner's Public private investment plan to recapitalise banks exuding confidence coupled with G20 promising coordinated action to restore financial stability, risk aversion had begun to scale down and money has started flowing into equities globally. Considering the fact that emerging markets are considered riskier, the indices have outperformed the SnP over the last few months.

However all is not lost for the value investors. They need to take a step back and look at what has happened over the last week or so in a clear and lucid manner.They should ask themselves tough questions like "What was not looking cheap at 9000, how is it looking cheap at 14000" before putting their money to work. We are already trading at more than 16 times FY 10 EPS which by no means is cheap. We must not follow the herd mentality and be branded as pioneers of the "greater fool theory" and end up buying the junk at high prices. What we saw from 3600 to 4500 was irrational exhuberance and lets allow some time for rationality to set in. Markets wont gallop in a tearing hurry from here on. They will give us opportunities time and again. Mr.Market is not a one way street. The market is not going to race away to 21000 from here and will take its pause, consolidate, yo-yo for some time and then come down before resuming its bullish ways. Remember the global recession is not over by any means and there's still some distance to travel before we wre completely out of the woods. Even from the domestic viewpoint, the fundamentals of the economy have not become buoyant all of a sudden. The problems on the export front have not disappeared. Having said that this rally of golden monday and tuesday has indeed created a disequilibrium in the market as explained in the theory of reflexivity by george soros. He evangelises the concept that just like how fundamentals can affect markets, market movement can also affect fundamentals which is largely acceptable and true. Its only the formation of a stable government at the centre without the leftist interference that has spurred sentiment favourably. There are expectations of reforms in various sectors of the economy and with political stability in place, business confidence is also set to rise. With FII's and hedge funds looking out for profitable avenues to park their money, they have zeroed in on India for the time being in the hope that many positive changes can happen here in quick time in an otherwise gloomy global setup.

Elliot wave chartists have also predicted that we have almost turned the corner as far as bear markets are concerned. We have already completed the five waves of a bear market from 21206 to 7697 and we are in the process of completing the balance 3 waves out of the total 8 waves of a bear market. We are in the last wave C of the bear market and that in my opinion has ended when the market came within kissing distance of 15000. So if you are an investor who believes in elliot wave theories, the next time we witness a solid fall to lower levels should be an opportunity to buy as the next rally we might witness on the upside might be sowing the seeds of a new multi year bull market which will take us to newer highs on the nifty and sensex over a period of time. Having said that, the probability of we tetsing the lows from here on is next to impossible. We will not fall below 9000 even under the worst global circumstances. I can say that with reasonable conviction now. The present pull back in the sensex over the last couple of days might continue until we reach 4000 on the nifty. Thats the support level where one can expect some more buying to happen. It would be prudent for investors to allocate 30-35% of their funds when the index scales back to 4000 on the nifty. The biggest advantage of having a pro reforms government is that business sentiment gets a huge fillip in such a short span of time. Banks start lending, IIP goes up, Capital flows reenter the country, FDI and private equity deals start happening again. To put it in a nutshell, the growth prospects of the economy appear positive and many global equity analysts will upgrade India and accord a premium valuation to frontline stocks as markets always factor/discount the future well in advance. The decoupling theories have already started doing the rounds in investor circles. The intelligent verdict of the indian populace to vote for a stable pro reform government has been the biggest greenshoot our economy has received so far.The key sensitivity or risk to buying Indian stocks can only be an abnormal slackening in the pace of reforms which might end up disappointing the markets at large. Also the other point investors should keep in mind is the fact that its the same beaten down stocks that are moving up again like the same real estate and commodity stocks, which some theorists point out is a continuation of the bear market.