Recent rally risky for retail investors

The average daily volume surged over 15% when the Nifty moved from 5,200 to 5,700 levels.

The recent rally, in which the stock market rose 10 per cent, should not be considered a turnaround in fortunes by investors. Most analysts believe it is a technical bounce-back, which need not be taken too seriously.

Anil Manghnani, director, Modern Shares & Brokers, said investors should watch out for pull-back rallies or technical bounces, as they are always sharp and vicious in nature when markets are in a bear phase. In 14 trading sessions, the S&P CNX Nifty advanced from a low 5,195 level to a high 5,740 level, but succumbed to profit booking on Friday, as the index was unable to cross the widely tracked 200-Day Moving Average long-term resistance on a closing basis. The index closed in the red for the second consecutive trading session on Monday, at 5,616, down 44 points.

A bear market rally is a sharp and vicious up move (around 10-20 per cent) in a bear trend, generally accompanied by a rise in volume. This is opposite to a bull market rally, which is smoother and there is fresh buying on every pull-back. The average daily volume surged 15 per cent when the Nifty moved from the 5,200 to 5,700 levels.

Indian markets have generally been in a bull market in the past decade, except a few instances such as the end of April and early May this year, when the Nifty rallied from a low of 5,364, crossed the 200-DMA and scaled a high of 5,908 in a span of 15 days, up 10 per cent. Similar trends were also seen in April 2001 and November 2002, when the index was trading below the 200-DMA and the markets rallied almost 12 per cent in 14-22 days. During the 2008 bear market, the rallies were vicious; the index jumped 18-15 per cent in a short time frame of eight-nine days. Most of these rallies were followed by sharp corrections and the markets giving up almost all the gains.

While not completely in a bear market, technical analysts say the Indian markets are looking weak on technical charts and they are in a “bear phase”. Manghnani says, “The Nifty has formed lower tops on the chart since the markets peaked in November 2010 and the short-term 50-Day Moving Average is below the 200-Day Moving Average, indicating the markets are weak.”

Moreover, the recent rally was driven purely by foreign institutional investor (FII) inflows of Rs 10,838 crore. FIIs are churning their portfolios and moving the market, says Manghnani. At the macro level, concerns such as inflation at 8 per cent continue to remain. AK Prabhakar, senior vice-president, Anand Rathi, says, “Fundamentally, commodities such as crude oil have rebounded to elevated levels and margin pressure from high raw material prices will be seen in the first quarter earnings of FY12 — which have already started trickling in — and put a downside bias on the earnings forecast.”

Independent technical analyst Ravi Nathani says, “In a bear rally, the corrections are steep and fast because fresh shorts are initiated in the system when there is a negative breakout and on the first day of the correction itself a 2-3 per cent cut is seen on the index. After this, the very next day, margin calls are triggered and panic selling may be seen in the market.” However, very steep falls may not happen this time as the overall retail participation in the rally is very low as compared to 2008.

Analysts advise short-term traders or investors to exit on small gains when such rallies happen, and invest back again when the markets correct until things improve fundamentally and there is a definite trend on the charts such as short-term averages crossing the long-term averages or Nifty trading above 5,740 levels for more than three trading sessions.