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Net to Net

Apr 7, 2000

One of the good things about the power of the internet is its ability to get information pretty quickly. One of the not-so-good things about the internet and computers is that there is so much information available that what does one look at? How does one sift the valuable from the junk? Well, if anyone out there has an idea to replicate the thought process of the brain, let us know: I would love to invest in the venture. Who knows, a Nasdaq listing may be a possibility. Not to forget all those ESOPs...

But, meanwhile, lets try and solve this puzzle.
Till about May, 1999, the net outstanding positions (gross purchases-gross sales) on the BSE were about Rs 10 billion (Rs 1,000 crores or US$ 260 million) and the BSE-30 Index was trading between the 3,200 and 3,400 range. Slowly but surely, the Index began moving higher and the net outstanding positions kept pace with it. As the market went up, more people got into the game and the more money they threw at the market, the higher it got, and that attracted even more people who threw even more money into the market.

That is what economists call a "virtuos cycle" and the simple folk on Dalal Street call "a time to party". Also, note that I have used the word "threw" money into the market, not invested because these are statistics of traders, not of investoRs Traders and punters pay or collect the difference between their buy and sell prices every settlement. Investors invest for the longer haul and either end up with very expensive wall-paper when they make bad decisions or, if they make good decisions, end up with chandi and isonai: these days better known as Infy and Sify. But letís get back to the puzzle.

So the net positions keep on rising from Rs 10 billion in May, 1999 (BSE-30 Index level of 3,400) to Rs 14 billion in July, 1999 (Index now at 4,100 levels) and then to Rs 30 billion by September, 1999 (Index is now nearing 5,000) and then there are all these fears of Y2K and the market sort of slips a bit and net positions decline to Rs 25 billion (Index at 4,500 to 4,800 range) as the traders, wary of foreign selling, move out of the market. But then, as December approaches, the Y2K fear seems to be declining in importance and the foreign flows into India increase to over US$ 370 million for December and the Index breaches the 5,000 mark - the net positions are now Rs 35 billion. By January 2000, the net positions are nearing Rs 40 billion and the Index had touched 5,500. By February, 2000 the outstanding positions had nearly touched Rs 50 bn (US$ 1.1 billion) and the Index was still near the 5,400 levels by month-end.

And then we had the budget. The market fell into a free-fall of some sorts and the net outstanding positions shrunk by 15% or Rs 6 billion to Rs 36 billion Ė the Index fell about 10% to the 5,000 levels.

Now here comes the puzzling part.
Between April 4th an April 6th net outstanding positions have fallen by Rs 6 billion or 19% to Rs 26 billion and yet the BSE-30 Index has gone up by 3%. Even if you look at the Index from the day before the Nasdaq 30-minute bear market, the Index is down only 2% against a 19% decline in the outstanding positions.

And FIIs have been fairly small net buyers of India stocks over the past few days with April 6 seeing a net purchase of US$ 12 m, as opposed to US$ 99 million the day before the fall in the Nasdaq.

So, the punters are getting out. And the foreigners are not big buyeRs And mutual funds are facing redemption pressures so it is unlikely that they are buyers

So, pray, Mr. Holmes, who is buying? And isnít it strange, Mr. Holmes, that in the past if net long positions increased, the market rose and if net long positions decreased (and neither did the FIIs pick up the slack) the market would fall, but now that relationship seems to have broken down? Oh, Mr Holmes, I have so many questions. But maybe I am looking at the wrong data. Back to the net again...

Changes in Net Outstanding Positions influence the
direction of the market...till now.
Date Net
Positions
(Rs bn)
Change
over previous
period (%)
FII net
buys
(US$ m)
BSE-30
Index
Change
over previous
period (%)
May-99 10 na 400 3,964 na
Jul-99 14 40.0% 347 4,598 16.0%
Sep-99 30 114.0% (170) 4,733 3.0%
Nov-99 25 -17.0% 283 4,622 -3.0%
Dec-99 35 17.0% 372 5,006 8.0%
Jan-00 40 14.0% 45 5,205 4.0%
Feb-00 50 25.0% 708 5,446 5.0%
Mar-00 36 -28.0% 275 5,018 -8.0%
4-Apr-00 29 -20.0% 49 4,692 -7.0%
5-Apr-00 28 -3.0% 24 4,757 -1.4%
6-Apr-00 26 -7.0% 12 4,867 2.3%

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