Market Watch: The long road to recovery

It’s good to see the Nifty get it’s head back above the 5000 mark. At least for the moment, it seems to have averted a retest of the January lows which is a step in the right direction. While the snapbacks have been very sharp; both the rise from 4500 to 5400 and even this current move to 5200, there is no conviction and participation in these rallies. Volumes are abysmally low. In such a scenario, market levels are not very important. Illiquid markets often have very sharp price moves but they don’t always point to any direction in a conclusive way. It’s not just prices which have got hammered, sentiment has taken a big nosedive. The reconstruction therefore needs to be not only in price levels but also in sentiment, participation and confidence levels. The two are connected but it’s a not a simple, linear correlation.

Tracking index levels may be a bit misleading. As we saw post May 2006, investor sentiment remained subdued for a fairly long time even as the Sensex regained all it’s lost ground. Partly because individual portfolios didn’t reflect the strides made by the index, as midcaps and small caps languished. Equity mutual fund NAVs lagged as well. We are in that edgy phase now where midcaps and smallcaps are moving too violently. On bad days, stocks fall 6-7%, on good days they bounce as much. Once this manic volatility subsides, we need to observe whether these stocks are settling in a price range much lower than their recent highs. Even today many of these popular stocks are trading 30-50% off their January highs. Any recovery in sentiment will be closely linked to this space, and the first signs of confidence will be reflected in trading volumes. While it will be wishful to expect mass participation in stock futures anytime soon, volumes need to pick up from their current daily average of 50,000 crores closer to the 80,000 crore level, which would still be much lower than the peaks of 1,20,000 crores which we saw last month.

Make no mistake, sentiment is very poor now. And no, a couple of heady days in the market will not turn it around, nor I fear may the Union budget. We are no longer in a momentum market. People are running scared. Doomsayers are predicting all sorts of levels for the sensex and in their current mood, investors are prone to believing the worst. Time has to pass, a base built.

Whether that base is between 15000 and 18,000 is a matter of conjecture. The three drivers of stock prices : fundamentals, Liquidity and sentiment all look a bit shaky just now but it’s sentiment that has taken the worst hit. Sharp V shaped recoveries are all very fine but we need now is stability, not excitement.

Executive Editor, CNBC-TV18