Most emerging markets failed to react enthusiastically to the Dow's big rally on Monday and India, despite a gap up opening, fell in line by the end of the trading day.
Investors, stung by the frequent sell offs, have stopped trusting these US rallies. However, even as traders shy away from trading the Nifty on account of unpredictable swings, the focus is squarely on stocks outside the benchmark index. That's where the real action is.
This indicates that market sentiment hasn't broken down completely. If it had, midcaps would have been the first casualties. Instead midcaps or non index large caps are actually seeing a fair amount of accumulation on dips.
Favourite sectors like banking have seen renewed interest. Stocks which delivered positive surprises this quarter are responding to those numbers : Punj Lloyd and TV Today are good cases in point. Even speculative favourites like IFCI, RNRL and IDBI are generating returns, so trader sentiment can't be too bad. So far, so good.
It's good to see that investors haven't gone into a shell fearing a repeat of May 2006. However, one shouldn't speak too soon. This stock specific outperformance/resilience will only continue if the market stops short of a savage correction.
Till 10% from the recent highs we are okay. That much volatility investors can digest. Anything more and the panic buttons will be pressed and all this midcap strength will go out the window. The herd feeling will kick in again and investors will start running for cover. Hopefully, the overall downside will be restricted to reasonable limits.
Expectedly, the first dip is being bought; it will be cruel if this conviction blows up in the faces of bullish investors.
(The writer is Executive Editor, CNBC-TV 18)