October was a swing month. The Nifty rose around eight per cent after hitting a 52-week low (4,720) in September. The move from 4,720 till above the 5,350 levels is quite impressive in itself. It’s still too early to tell if this is a technical correction inside a big bear market or if it’s the beginning of a reversal that will lead to another big bull market.
The pattern so far could fit either hypothesis. If the September low was the ultimate bear market bottom, the bounce would be normal and it would be sustained with a pattern of higher highs and higher lows developing. If this is just a technical correction, the bounce will peter out soon and new 52-week lows, below the 4,720 mark, will be generated in the next downturn.
To further complicate any diagnosis,the latter stages of the rally occurred during a truncated week when many domestic players were out of action. So, we don’t have a very clear take on sentiment. In technical terms, one would look for one of two signals.
The positive signal would be a climb above the 5,500 level, which would then act as a support. That would pull the market above its own 200 Daily Moving Average, which is generally a reliable confirmatory indicator of market direction. The negative signal would be a fall to a low that breaches the 4,720 level. It’s quite likely that the market will tantalise analysts by range-trading between these key levels of 4,700 and 5,500 for an indefinite period.
In macroeconomic terms, inflation has remained untouched by monetary policy and there has been a general slowdown in growth. Q2 results have led to more earnings downgrades than upgrades. In terms of valuations, the market looks frothy at the current averaged Nifty price to earnings (P/E) ratio of 19. With the 364-Day-T Bill trading at a yield of 8.5 per cent, one wouldn’t want to assign an earnings multiple of greater than 13-14 to diversified equity holdings. Current earnings growth estimates also suggest that the PE to Growth (PEG)ratio of the Nifty is well over one. And, Indian bear markets have historically bottomed out at PE ratios of 10-12.
However, where the Indian stock market will go has less to do with the markets’ own fundamentals and much more to do with external perceptions. Thus far in calendar 2011, FIIs have been heavy net sellers of rupee assets.
As a result, India is the worst performer among emerging markets this year. This makes it somewhat more likely that we’ll see an excellent performance through 2012. Any revival will have to start with a change in FII stance and enthusiastic buying on their part. Any such change in sentiment is more likely to be linked to events in Europe, the US, West Asia, North Africa and other parts of the world than to India.
