The ominous note on which the Moorat session ended was probably an indication that the scales are tipping in favour of the bears in the near term. If that was not enough, the US market performance on Friday paves the way for some more red on the screen. The consolidation now has a corrective hue about it. The moot point is whether we get off light. Even if the Nifty were to drift down to 5,500 and stop there, it would qualify as a gentle enough correction. Any more and the bulls will start worrying about the possibility of pulling back all the way to the 5,000-5,100 zone, the base from which this blowout phase took off.
The problem is the global situation and liquidity. The US market has had weak spells but this kind of sustained weakness is visible after quite a while. The Dow almost seems to be breaking down. While a large degree of decoupling has been established between the US and emerging markets, a sharp US sell-off may trigger a correction. India has been resilient, but the flows situation is not conducive now.
Given the absence of foreign portfolio investors, the market is dependent on domestic flows. Traders in the futures market have had a good run and may not wish to carry the can beyond a point. The "do not sell" syndrome, which kept prices shooting up, may turn to profit preservation mode. The first signs will be apparent in the stock futures segment, where speculators have been building positions with gay abandon. This week will be a test for the liquid mid-caps and non-index large-caps.
What is happening now is quite healthy and desirable. What shape it will eventually take is difficult to predict but a non stop rally to 22000-23000, which looked quite likely even a fortnight back, may not have been the best thing to happen for the market. A pause and a pullback was necessary. If the correction carries on for a bit longer, some of the complacence will get shaken, the mindless blowouts in individual stocks will perhaps get arrested and for serious buyers, stock prices would have come down to respectable entry, if not inexpensive, levels.
Udayan Mukherjee, Executive Editor, CNBC-TV18