This had to happen. The market was setting itself up for a fall. Too much euphoria, too much complacence was blazing on the screen. A correction was inevitable. The billion dollar question is whether this is a scare that shakes off the weaker hands and restores some sanity to the market or the start of a bigger corrective leg. It is not easy to answer that and no, the law of extrapolation is not a good guide. Else one good day at work would always lead to another and the same on the way down. That is how day-traders think and they often go wrong.
Market moves are totally unpredictable, it is better to focus on the reasons and triggers: sometimes it is easier to find answers there. The first reason for this fall is the rise itself. The way India did not participate in the emerging market correction and particularly the way mid-cap stocks ballooned over the last fortnight. In a very short span of time, the rise has been dizzying so the retracements could be sharp as well. Stock futures positions had shot to Rs 65,000 crore and some more shaving off may be required. The fall has been too quick for all to unwind. Shorts are building up as well, the Nifty futures premium turned into a 30-point discount and over 5 million shares got added. Then there is the foreign fund side of the story, the figures for the last couple of days are not encouraging at all. A couple of influential investment banks like Citigroup and Morgan Stanley have turned bearish on emerging markets and that may have precipitated some selling in the biggest outperforming market, India. Equally, the yen above 110 to the dollar is a reflection of risk aversion that needs to be monitored.
It never looks good after a 4 per cent fall, so one should try not to get carried away. Last time, the Nifty broke down to 5,500 but found great support there. This is the second assault at that support. More than the Nifty, it is the mid-caps that need to be watched closely. Many of them still have a lot of froth in them, so it is meaningless to look for value supports. The supports have to be technical and momentum-linked. For traders, then, the market better stabilise in the next day or two else bigger wounds may be inflicted on their cherished mid-caps. If that were to happen, history would merely be repeating itself.