Rebound stubs out correction blues

MARKET WATCH

A strong rebound in stock markets has set aside correction-related worries amid expectations of FIIs coming back after a long spell of selling since early December.

FIIs have been following a strategy of selling in the cash market and simultaneously buying in the futures to prevent a steep market fall. The recent rise is mainly because of FIIs covering their short positions in the futures. FIIs and, especially, hedge funds are more aggressive players in the market.

Remember the two consecutive days' steep fall in the Sensex a month ago, first on CRR hike and then on low industrial output figures? Since then, FIIs have been selling.

On Friday, when the Sensex rose 425 points "� its steepest rise in the last six months "� it came back a full circle with the industrial output figures for November out, the best in the last 11 years.

The move to empower the RBI for a reduction in the SLR is more of an enabling nature. But the market reacted positively to it, almost nullifying the impact of a CRR hike. Worries of interest rates firming up on CRR hike still persist. The market seems to be ignoring it.

The rebound in the last two trading sessions is so strong that "we are confused about where the market is heading", said an analyst with a leading brokerage house, which has given a cautious signal to its clients.

This is the third time that the Sensex has seen the 14,000 mark. "I see the Sensex going up to the 14,500 mark, though, for the time being, I will remain cautious," said Vaibhav Kapoor, group chief investment officer, IL&FS.

According to him, interest rate worries still loom large. He expects that the RBI may raise interest rates in the quarterly review of the Credit Policy in January-end. The market will have to take note of these developments.

Meanwhile, he is betting on small and mid-cap stocks, as "they have not risen in tandem with the Sensex in the last year and hence a lot of churning in favour of these stocks can be expected".

The technical indications from the last week's trading are bullish. The results of major IT and manufacturing companies are awaited. A steep fall in crude oil prices is also a positive sign. Increase in interest rates, if any, can be hedged against a fall in crude oil prices.

If prices remain below $60 a barrel during the quarter, industries can easily offset any increase in the cost of funds on account of firming up of interest rates against lower crude oil prices. Meanwhile, prices of metals are also falling and may remain soft.