Market watch: skimming some of the froth
Many mid-caps are rallying after a full year of underperformance. The point about these stocks, though, is that they can cover a year's distance in 10 days, writes Udayan Mukherjee.business Updated: May 23, 2007 23:47 IST
After breaking into all-time high territory, the Nifty has gone quiet again. It is not unusual for the market to pull back for a day or two when it becomes overheated, so one should not read too much into Wednesday’s dip. In fact, it is quite healthy, the way some of the non-index stocks corrected. There was just too much froth that had built up in many pockets and traders were getting too complacent. A bit of a jerk was always on the cards.
Sure, many mid-caps are rallying after a full year of underperformance. The point about these stocks, though, is that they can cover a year's distance in 10 days. The media sector is a classic example. Balaji Telefilms corrected on Wednesday after gaining 50 per cent in the last eight sessions.
UTV did exactly the same. Even larger cap stocks like Reliance Capital had become really overbought, having run up 40 per cent in the last 10 days. Stock futures pile-ups have been instrumental in the rise of many mid-caps. This can be potentially dangerous, as the experience of last May teaches us. As long as prices are moving up everything looks hunky dory, at the first sign of trouble these stocks fall without a bottom.
Interestingly, F&O positions have reached all-time highs and that is something that needs to be monitored closely.
The screen seems to be suggesting there is more upside from here. That is what the market internals and the current trading momentum would indicate. The one niggling fear that is there at the back of one's mind is the prospect of a sudden reversal in the global tide, for some reason.
The mood is good now, traders are chasing momentum, a lot of leverage is on the table again and most markets are at new highs; if something goes wrong somewhere, the margin of safety is low. As long as one understands the risks of going long now, it is fine. Just do not walk in with your eyes shut.
The writer is Executive Editor, CNBC-TV18