The Sensex rally of 700 points on Wednesday may have come as a much-needed soother to investors who have seen their wealth almost halve since the beginning of the calendar year. But the billion-dollar question will be – is the pullback rally going to sustain? With external factors like crude prices and a high rate of inflation continuing to haunt equity markets, analysts expect more weakness in the near term.
"It is just a sharp rally after a big… big… fall. We are clearly in a bear phase and the markets need to hold up for a long time for some bullish sign to emerge. The weakness may even go on till 2009 until some certainity emerges on the political front as well," said Prem Daga, a technical analyst.
What would determine the immediate near-term trend will be the inflation figures expected on Friday and how crude prices behave in the coming days. Inflation may spill above the 12 per cent mark after the recent seven-per cent hike in aviation turbine fuel, which may spell doom for the equity markets.
However, market experts converge at buying stocks at current levels with a medium-long-term perspective as several shares are now almost half of what they were in the beginning of 2008.
"Uncertainties surrounding crude prices and inflation may cause some more short-term pain in the markets. One needs to be cautious in this market and keep on buying fundamentally strong stocks with a long-term outlook," said Kashyap Pujara, PMS fund manager of Enam Securities Direct.
With the Sensex closing Wednesday nearly 39 per cent lower than the all-time high closing of 21, 206.77 points recorded in January 2008, several stocks are available at cheap prices and make good value buys in the long term.
For instance, the BSE banking basket is currently available at a price-to-adjusted book value of 0.8.
Will rally stay?
This means that the shares of banks are available cheaper to the book value per share arrived at after deducting non-performing assets and adjusting assets and liabilities at the market value.
Further, Realty stocks that took a severe battering in the recent market fall were found trading at substantially low prices from their all-time highs. Thus on Wednesday, investors were sweeping up realty stocks in chunks.