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Market Watch: Living in confinement

Every rally is an invitation to sell or short and every sharp decline - to cover or open long positions. It's boring, predictable and painful to watch, writes Udayan Mukherjee.

india Updated: Apr 08, 2008 22:49 IST
Udayan Mukherjee

Observing the Nifty too closely could result in acute Claustrophobia. It has been living it's life stuck within the close walls of 4500 and 5000 for many weeks now. And such is the conviction that those boundaries are inviolable that the walls have even shrunk of late , to between 4600 and 4900. No bull or bear dares to trade with confidence beyond those boundaries. The result: every rally is an invitation to sell or short and every sharp decline - to cover or open long positions. It's boring, predictable and painful to watch.

This , I suppose , is the dreaded "time wise" correction which has eluded us these last many years. And if it is, we haven't seen anything yet. Five weeks is hardly long enough for the first real time wise correction in four years. The closest we saw of such a correction was post May 2006 but that was restricted to the midcap universe. The Nifty, on that occasion, had bounced back quickly enough. The real big time wise correction was in the post tech bubble collapse. I remember that vividly; months passed as stocks moved in a 5 per cent trading range. Analysts kept on talking about embedded value but stock prices just did not respond. You felt like banging your head against a wall. Of course, that was a pronounced bear market after a period of mindless euphoria, so the hangover of excesses was immense. Maybe we are not in such a bad situation today, but anyone who has been through that phase cannot but fear it.

When people talk about breaking out of this range, most actually mean an upward breakout. Investors want to "buy" stocks and a majority of traders want to trade "long". Shorting is the preserve of proffesional traders. So, for this time wise correction to end in a break out, a few things need to happen. Earnings degrowth needs to be arrested, commodity led inflation needs to be tamed paving the way for interest rate easing, the US economy needs to demonstrate that it's not going into a long and deep recession and global risk appetite needs to recover. One look at the triggers above will tell you that they could make us wait for a while if things turn bad. So, if you are not the patient sort, your feathers could easily get ruffled in the months to come.