We will know only in hindsight if a bottom is firmly in place for 2008. Maybe it is, maybe not. Yet this bounce was not entirely unexpected. I had outlined last week, in this column, the case for a bounce-back of surprising proportions. Simply because the market technicals warranted it. The purging of the futures market, release of blocked liquidity from initial public offer (IPO) refunds and some clawback in global markets prompted by policy action were all expected. Only Dr Reddy did not play along with the script, but then he never does.
Globally, the signs of a pullback were quite apparent. The CBOE VIX, a measure of volatility, peaked at 37 on January 23 after climbing for five continuous weeks and has started declining. This is typically a sign of a near term bottom. In earlier instances of subsiding volatility, the peaks were not tested too soon after being touched. Of course, this time could be different, particularly if a fresh dose of bad news suddenly comes out of the US economy. Pending that, a global equity pullback is on: most Asian markets have recovered between 5 and 15 per cent from recent lows. They are still 10-15 per cent off their recent highs though. The big question is whether this pullback will end much before reclaiming all the lost ground or will some markets actually make it back to their old highs. The jury is out on that. Some believe a bottom is in place while others say this is just a trading pullback that will terminate in a lower top and the market will then revisit recent lows.
All that is too difficult to predict. It is entirely possible that the market seeks higher levels this month. Clearly, traders are not quite convinced about that, which is why volumes are so low despite the smart pullback. But If the Sensex does move back above 19,000, "investors" should probably go a bit light on fresh purchases. If the Nifty rallies back to 4,700-4,800 this month, it would have risen 30 per cent from the lows of 4,400. The low-hanging fruit has been plucked. Most stocks would still be off recent highs but many of them would not represent screaming value as they did just 10 days ago. Value should be measured in itself, not necessarily in relation to all-time peaks. If you were brave enough to buy in the panic, pat yourself on the back and start withdrawing slowly. It does not matter if you do not chase the last 5-6 per cent. Enjoy the gains you have and wait for the next wave of panic. It will come again, possibly this year. That's the time to be brave again.
(The writer is Executive Editor, CNBC-TV18)