Market sentiment has been on the mend this week. After that initial dip towards 5000 on Monday, the Nifty rallied to 5350 before encountering some resistance there. The big question is whether this is the beginning of a durable recovery or a brief flash that fizzles out around 5500, like last time. The two obvious reasons for this week's strength are global market stability and some pre budget sentiment, in that order. The key to the sustainability of this market rally lies in these two outcomes too.
Investor expectations are low this time so it is entirely possible that if the budget doesn't have anything specifically bad for capital markets we could see the March series opening up well. A sensex move to 19,000 cannot be ruled out then.
Global market stability is more important though. There too, a contrarian move could be shaping up against the wall of pessimism that abounds. That, more than anything, could be the most important driver of any global equity rally over the coming weeks. Sentiment is terrible, almost everyone expects more downside, investors are either sitting on cash or short equities. The reasons are not diffciult to see but such bearish conditions are often the bedrock of surprising rallies.
These moves are always difficult to predict as they go against the grain of consensus wisdom and even hard economic realities but markets are markets.
It's not a done deal yet, by far. A rally is a possibility, no more. If that possibility were to play out then traders will chase prices but investors should ask how they should play it. If the rally is of surprising proportions, say the Nifty goes to 6000 or the Sensex past 20,000, and I am sure a quick 10-12 per cent rally from here would surprise most people, then investors may do well to cash out towards the end of it.
My own sense is that cash raised at those levels may find much better price points to enter a few months down the line. Too many people are bearish now, the market may well feed on that to deliver a surprise but as soon as consensus turns bullish again in a difficult economic backdrop, it would set the stage for more turbulence.
We haven't seen the last storm of 2008 yet but who can rule out a sunny spell before it pours again?
(Udayan Mukherjee ia an Executive Editor, CNBC-TV18)