Market Watch: The inevitable pull of gravity

The market was setting itself up for a fall. Too much euphoria, too much complacence was blazing on the screen. A correction was inevitable, writes Udayan Mukherjee.

This had to happen. The market was setting itself up for a fall. Too much euphoria, too much complacence was blazing on the screen. A correction was inevitable. The billion dollar question is whether this is a scare that shakes off the weaker hands and restores some sanity to the market or the start of a bigger corrective leg. It is not easy to answer that and no, the law of extrapolation is not a good guide. Else one good day at work would always lead to another and the same on the way down. That is how day-traders think and they often go wrong.

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Market moves are totally unpredictable, it is better to focus on the reasons and triggers: sometimes it is easier to find answers there. The first reason for this fall is the rise itself. The way India did not participate in the emerging market correction and particularly the way mid-cap stocks ballooned over the last fortnight. In a very short span of time, the rise has been dizzying so the retracements could be sharp as well. Stock futures positions had shot to Rs 65,000 crore and some more shaving off may be required. The fall has been too quick for all to unwind. Shorts are building up as well, the Nifty futures premium turned into a 30-point discount and over 5 million shares got added. Then there is the foreign fund side of the story, the figures for the last couple of days are not encouraging at all. A couple of influential investment banks like Citigroup and Morgan Stanley have turned bearish on emerging markets and that may have precipitated some selling in the biggest outperforming market, India. Equally, the yen above 110 to the dollar is a reflection of risk aversion that needs to be monitored.