The amber lights seem about to turn red. Red seems apt as well in light of the general political cloud over the market. After the recent volatility, the market was looking for a trigger for a directional breakout. It got a negative one in the form of politics. The process of stock futures unwinding which began last week simply accelerated as liquid mid-caps tumbled between 8 per cent and 15 per cent in a single session. Weak hands who had piled on trading positions after the Sensex crossed 17,000 panicked on early election fears.
What is equally significant is the lack of buying support for the quality large-cap names. This is a departure from last week's trend. Then the market would fall but institutional buying would emerge immediately on the large cap names and the index would pull back.
The absence of such buying yesterday may partly be a fallout of the US jobs data which came in on Friday. That would suggest the absence of sharp Fed rate cuts from here and a bounce back in the dollar, both near-term negatives for flows into emerging markets like India.
The market may be sensing that the unusually large flows of September may now get stemmed. At least temporarily.
Politics is a serious headwind, there's no denying that. While the market is aware of the risk, one can hardly say that a Sensex of 17,500 prices in the fall of the current government. That’s just too wishful. So maybe this is the card which triggers off a long overdue correction after a vertical rise, a correction that should hardly come as a surprise. Nor should it be unwelcome. Some of the recent rallies in sectors like power seemed extremely excessive and frothy and a slight cooling down of the euphoric sentiment is not such a bad thing. After a 30 per cent index rally, a 5-10 per cent correction should be par for the course.
(The writer is Executive Editor, CNBC-TV 18)