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Market Watch | Risk-reward on a fine balance

My sympathies for futures traders who tanked up on momentum stocks over the last couple of days, writes Udayan Mukherjee.
By Udayan Mukherjee | None
UPDATED ON FEB 07, 2008 10:55 PM IST

My sympathies for futures traders who tanked up on momentum stocks over the last couple of days. Once again, they were swept away by a wave of selling in late trade yesterday. Most of these positions would have lost money and were forced to wind up again. Clearly, speculators hadn't learnt their lessons from the january crash, so here's another reminder. I genuinely believe traders are making a big mistake trying to trade this volatility. It's difficult, nearly impossible to trade in such uncertain conditions. I am actually quite surprised to hear analysts speak about levels with such conviction in such an environment. This is no traders' market , hasn't been for nearly a month now.

Global uncertainty lingers and what is particularly worrying is the incessant selling from FIIs. One doesn't know if this is because some hedge funds are eager to switch out of emerging market positions or if there is some genuine redemption pressure on the large emerging market funds. The drying up of institutional interest for some of the recent IPOs also betrays a lack of inclination or ability on part of FIIs to put in fresh money to work in India just now. The continuous hammering of Nifty futures from FIIs is disturbing. Bears are getting active.

Locally, the top brokerages may not be screaming yet but local professional investors are worried about earnings growth after the quarter that went by. The first downgrades are always “reluctant” ones by analysts as they are coming out of a continuous upgrade cycle. Stock prices, though, always move faster so one needs to examine if the market, in it's wisdom, has already started derating some sectors. One shouldn’t get too bearish from these levels but it may not be a good idea to be terribly complacent about the downside risks. The risk reward equation seems finely balanced.

(Udayan Mukherjee is the Executive Editor, CNBC-TV18)

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