Friday's bottom is being re-tested. Whether it will hold is a big question. To bounce again from there, we would need another global bounce or a quick resolution of our domestic political crisis. Tuesday's sell-off betrays how brittle sentiment has become.
The market seems more keen to factor in bad news, which is never a good sign. So far, we were outperforming other global markets in this correction, now we have started underperforming. Even mid-caps, the sentiment barometers for our market, have started tumbling after being remarkably resilient throughout this fall. Despite the 2,000-point correction global money is still not coming in to buy the dip and reported FII figures continue to be negative. These pointers do not bode well.
The picture remains murky in the near term with the twin drags of politics and global turbulence. Since both these issues have significant impact on sentiment, a bottom is not easy to predict. Neither is it wise to focus on finding one. For investors, we are about to enter the "value" zone after a long time. Given our growth rates, a 14-16 forward price-earnings multiple should represent value, closer to the lower end of that band should actually stand for "deep value".
Assuming Rs 860 of earnings per share for the Sensex companies in 2007-08 this works out to a band of 12,000-13,800. I am not suggesting for a moment that the bottom is here at 13,800 or as low as 12,000, but these are benchmark bands to keep in mind so that one does not lose sight of valuations.
A similar exercise for one's favourite stocks would be very meaningful at this point. The noise levels are rising and if it continues like this, panic conditions may surface. Even if it does come about, the idea is not to lose one's head in that panic, but profit from it. However, unless you are disciplined and put these numbers down on a piece of paper, to act on it when the time comes, you will never be able to do it. The sheer noise, opinion and chaos will prevent you.
Can it get worse, though, before it gets better? Sure. The current uncertainties have actually raised the odds of that happening. Can it get to the point where people start questioning this bull market? It certainly can. So if you are a trader, you have got to hope for the best and prepare for the worst. For an investor looking to buy though, it is the opposite. Hope for the worst and prepare for the best. The good times will return, after a break.
(The writer is Executive Editor, CNBC-TV 18)