Since the disastrous January derivitives expriy, the technicals of the Indian market would appear to have improved considerably, at least in a relative sense. The froth in the futures market has been washed away with the stock futures position standing at only Rs 30,000 crore, a fraction of what it had risen to last month. The other ostensible reason for the January crash--constricted money supply because of IPO subscription--has also been corrected. IPO refunds are in from both Reliance Power and Future Capital. In fact, even the listings are done so the flippers have had an opportunity to book out.
Curiously, none of this has led to any visible relief for the market, contrary to general expectations. Despite improved technicals, the trend remains southward, volumes are pathetic and every rally is getting sold into.
The obvious culprit is sentiment. Local sentiment has been crippled by the savage January sell-off and more recently by the dismal events of the IPO market. Global sentiment is not much better with investors getting into a shell fearing the onset of a recession-fuelled bear market.
The not-so-visible and talked-about reason is core fundamentals. One wonders though whether the market, in its wisdom, is bracing itself for disappointment on the fundamental front. So far, the market is assuming 18-20 percent earnings growth this year. Given that, the current price-earnings ratio of 16 times 2008-09 seems comfortable. However, as this growth--led by sectors like metals, realty and power--slows down, valuations will need to be revisited. Particularly so if other emerging markets see a contraction in valuations led by bearish global constraints. Could that be the reason for stocks getting de-rated in many sectors? I hope that is not the case but am inclined not to close my mind to that possibility.
Analysts are often in denial when the rot first starts seeping in. Stocks move first, headlines follow later. Hopefully, it is just sentiment, not fundamentals, where the problem lies.