Rally may extend before fizzling out

MUMBAI: After a gap of exactly four months, foreign investors bought equities worth over Rs 1,000 crore (Rs 1,300 crore, says provisional data) in one session on Wednesday. The last time they did so was on March 25, when they net bought equities worth Rs 1,000 crore or $230 million.

The Sensex had then rallied 928 points as the US Federal Reserve cut its funds rate by 75 basis points and helped bail out Bear Stearns, the troubled Wall Street bank.
On Wednesday, the Nifty and Sensex rocketed 236 and 838 points, respectively as total number of trades on the Bombay Stock Exchange and the National Stock Exchange combined crossed 10 million for the first time since January 4 this year.

On the NSE, trades touched an all-time high of 7.17 million. Ashok Jainani, head research at Khandwala Securities, says participation was up dramatically. “A good part of this could be from retail. The number of trades and the values are significant. Values are emerging and people are showing interest,” he said.

But Devesh Kumar, managing director, Centrum Broking, preferred to call it a relief rally caused by falling crude prices and improving global scenario. Kumar expects it to fizzle out around 17000-18000 levels.

“The rally is also fuelled by expectation of reforms (by the new alliance in power). But the conversion of these expectations is key. If that doesn’t happen, then things would start looking bad again. However, I still stick to my earlier view that the Sensex will be trading between 25000-35000 two years from now,” he says.

Analysts feel the current rally has similar characteristics as the 3100-point bear market rally of March-May and is not yet the resumption of the bull trend.

The five-day old rally still appears to have steam left, but with things running off too fast, bears may be down but not out yet.

Anoop Bhaskar, head of equity with UTI Mutual Fund, remains cautious.
“Our equity strategy is based on our in-house five-pillar approach —- interest rate; inflation; macro economic outlook; global flows and political stability. Political stability has become a non-issue for the short-term now. However, the other four pillars are still fragile. Hence, our medium term strategy for one year remains cautious.”

Interestingly, the 928-point rise on March 25 was part of the Sensex rally from 14677 to 17735, which took just 45 days.

But the index fell into a deeper hole subsequently, with oil prices flaring up and political uncertainties queering the pitch, turning it into a bear market rally.

Morgan Stanley analysts Ridham Desai and Sheela Rathi said this rally is likely to gain momentum if a number of variables such as crude prices, global markets, inflation data corporate earnings and RBI policy action( rates) remain favourable. “Indeed, this is likely to be a strong rally, …if these conditions continue,” they said in a note to clients on Wednesday.

However, they warned bulls against complacency and said this is just a bear market rally.

“We think this is likely to prove to be just another powerful bear market rally. After all the market still faces headwinds from high crude oil prices, political uncertainty, fragile global financial markets, weak domestic sentiment, likelihood of higher long bond yields, slowing growth and prospects of earnings downgrades,” Desai and Rathi said.