The Sensex is barely 4 per cent off from all-time highs, yet the screen is not exhibiting strength for the last few sessions. Intra-day volatility has shot up significantly and the Nifty is struggling to scale 6,000 and stay above it. Now, this is not to sound off any alarm nor to suggest that there is panic out there. Far from it. Yet, there is a bit of discomfort building up in the pit of one's stomach. Maybe this will, on hindsight, be one more brief spell of somewhat violent consolidation after which the market goes on to post new highs again, or maybe it will not. Either way, it is prudent to wait and watch for a bit as the signs are a bit unclear.
Trading is turning edgy. Stocks moving 20-25 per cent a day may look nice but these blowouts are usually followed by sharp falls. The way Reliance Petroleum and Reliance Natural Resources cracked on Tuesday could not have been comforting for futures traders. Equally, the way some of these power-related stocks are flying about defies any fundamental rationale. Yes, power is a sector with immense potential but the stock price movements of some of these stocks are quite crazy. There is very little margin of safety in many of these popular stocks, in fact most of them appear quite frothy. Too much by way of distant expectations priced in already, too little regard for any execution risk. Heaven forbid, if for some reason the market were to go into a phase of correction, some of these can correct quite sharply.
The general health of global equity markets will hold the key. A touch of volatility is visible again and some fundamental clouds have surfaced on the horizon. Hopefully, these are not storm clouds and will blow over. Do not get me wrong, this is not to sound bearish, only to point out that the risks have risen a bit. Global uncertainty, drying up of foreign fund flows for the moment, complacency in retail investors, elevated valuation levels and lack of any near-term positive triggers make the risk-reward equation a bit dicey. This is not an invitation to short the market but prudence suggests that large long and leveraged commitments are best avoided, at least till the screen clears up a bit.