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Market watch: Tackling the falling knife

The trading screen has made for an interesting study these last few days, Udayan Mukherjee tells us more.

india Updated: Aug 06, 2007 20:23 IST
Udayan Mukherjee

The trading screen has made for an interesting study these last few days. While there is a lot of fear flashing there, traces of greed can also be seen, the fear is understandable, it is the greed that is interesting.

We did witness buying in blue chips like State Bank of India, ITC and Tata Consulting Services on Monday and even in some trading favourites like IFCI, Prism Cement and Zee News.

There is no panic like that of May 2006 yet, the general assumption is that the fall will be arrested soon and we will bounce back.

This, on hindsight then, will look like a great buying opportunity. I have no problem with that assumption, in fact, it does look like a very likely outcome.

It is the complacency that worries me, as market scenarios do not often play out along expected lines. When they do not, the resultant pain is quite ugly. Hopefully, it will not come to that.

Before one catches the falling knife, it is important to be clear about the fundamentals on the ground. Things are solid in India.

Unless something goes really wrong, the Sensex should report Rs 850 in earnings per share this year. Even if valuations contract, it would take something major to compress price-earnings multiples below the 15-16 range, given our growth rates. That corresponds to a range of 12,800-13,600 points on the Sensex.

This range should be a strong fundamental base for our market. Unless things go for a complete toss globally, we should not trade significantly below these levels.

We may not get anywhere close to that if the global situation stabilizes, but since these things are unpredictable it is best to work with the worst-case scenario in mind. A lot could go wrong externally though.

If the US situation worsens to an extent where we get into a longer or bigger global depression, liquidity withdrawals could temporarily upset all these calculations. Ultimately, it is a market where prices are set by demand and supply, not by Excel sheets. But assuming that our market fundamentals do not change, those will be aberrations rather than sustainable scenarios.

All decisions to catch the falling knife now must factor in these scenarios; one should always walk in with eyes open. Often investors get in after the first cut, and then capitulate as the cut deepens and the second wave of selling sets in. That is not a clever way of doing it.

Know your downside, recognise that we may not get there, and plan your purchases accordingly. The volatility is paralysing yet one has to rise above it, to be able to make money.