The case for a pullback was strong yesterday. Even if it was a temporary one, the market should have rebounded from oversold ground, as most of our neighbours did. Hong Kong and Singapore closed nearly 3 per cent up after starting in the red and even Japan, Thailand and South Korea posted smart gains. The Sensex did get its head above 20,000 in mid-session but then slipped quickly back on selling pressure.
India's relative outperformance this year may be weighing it down.
The pullback may yet materialise, but yesterday's failed attempt raises fears that we are getting into a sticky patch. Through this week there seems to be delivery-based selling on large-cap names. It started with Bharti but then Reliance, TCS and Ranbaxy have all dipped after their earnings announcements. The market does not seem to be particularly sensitive to earnings just now; unless there is a marked positive surprise, prices are heading southward. Pressure is also visible on metal names likes Sterlite and cement counters like Ambuja. What is a little disconcerting is that this decline is, so far, not led by large-scale unwinding from the derivatives segment. There is no major cut down in futures open interest and even the Nifty futures is trading at a significant premium. Thus there does not seem to be any retail panic yet but equally that may be waiting to come if the fall continues for another day or two. The futures market is not looking very oversold or de-leveraged yet. Most of the damage seems to have happened in the cash market, which is not a good sign.
Of course, we know better than to infer too much from market internals. A couple of good days can change the picture around, as has happened in the past. Yet, the nagging feeling of dread persists. Local investors look very comfortable, perhaps with an eye on the budget.
But they will need to support the market if indeed it has to stay in a positive range. There is not much by way of support from either global news flow or liquidity flows. It is a tricky phase, I hope we come out of it without getting burnt too badly.