Short covering has been a constantly recurring theme in this entire bull run. The ferocity of yesterday's pullback suggests yet another short squeeze. With P notes, politics and global volatility, the bears thought they had a perfect recipe for a sell off. Sadly for them, the bulls are too strong. All they needed was a bit of purchase to get their grip back.
On P notes, the capital control fear has waned considerably. When the FM came out and proclaimed that the P note clampdown was targetted at cutting FII flows, the market feared that SEBI's moves would be aimed squarely at keeping P note investors out. Now, it appears that those ideas have been abandoned. The new tune is transparency and SEBI seems to be keen to widen the window of participation for FIIs. We still await the fine print, but the initial signs have come as a relief to a market worried about being starved of capital inflows. This aside, the way global markets stabilised yesterday must have acted as trigger on the margin. Politics too, it seems, has been put off till the middle of November, so the market has one worry less for the moment.
It is tough to say whether the correction is over. If it is, then it would have been the shortest and possibly the smallest in this entire bull run. That would be quite amazing. Even if the market is not ready for significantly newer highs just yet, it would take something truly bad to break the Nifty below 5,000. Some volatility should never be ruled out at these levels but it appears that new buying is emerging at 5,000 levels.
Fundamentally things seem okay. Earnings are generally on track, at this point there isn't any reason to revise 2008 or 2009 EPS forecasts down. The trigger then has to be external. The fine print on the 25th and global volatility seem like the most obvious clouds on the horizon. Whether they are rain bearing ones or not, we will find out in the next few days.
When I wrote on Monday that the fall was yet another buying opportunity, I had not the slightest inclination that the pullback would be so spectacular. Yet, that thumb rule has generally worked throughout this bull run. Using every panic to accumulate good stocks and then holding on patiently. As they say, if it ain't broke, don't try fixing it.
(The writer is Executive Editor, CNBC-TV 18)