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In a bear market?

Jun 2, 2001

The Sensex has lost 4.4% since the close on Monday last and 184 points in the last three trading sessions. The BSE sensitive index had gained 9.3% since the last weekly decline in April '01. However, more than half those gains were washed away in the recent sell off. The absence of any triggers has left the market directionless leading to nervousness among the participants and consequently kept them near the exit door. The recent slide on the NASDAQ arising from renewed fears on corporate earnings, especially in the new economy, stubbed the domestic tech rally. Sun Microsystems warned that revenues and earnings for the third quarter will be below earlier targets.

Adding to the woes are fresh reports of industrial slowdown, shortfall in Government tax revenues and a downgrade in sovereign rating. All of which, took the old economy counters in. The Index of Industrial Production (IIP) for the first eleven months of FY01 grew by 5.1% compared to 6.4% in the corresponding period of the previous fiscal. IIP growth for month of February '01 was a meager 0.6% YoY. Government tax revenue collections are expected to fall short of FY02 targets, which could impact the sensitive fiscal deficit number. Also, credit rating agency, Fitch, downgraded India's sovereign rating from stable to negative. The normal monsoon has been the only saving grace. However, distribution yet remains a grey area and at the risk of being proved wrong, the weather is more fickle than the markets. Needless to say, actuals could turn out to be at variance to the forecasts.

During the bubble days the Sensex rose by an estimated 114.7% from the lows seen in October '98. Over a very similar period the NASDAQ rose by a whopping 255.7%. Since busting of the tech party the NASDAQ has fallen by 3,410 points or 67.5% (high to low). Meanwhile, the BSE Sensex crashed by 2,750 points or 46.3%. Both the indices have moved higher after reaching close to their pre-indulgence levels. But are they yet to pay more penance?

As mentioned earlier, the lack of visibility on market direction could keep participants on the edge of their seats. Rallies could remain weak and fizzle out on the slightest hint of bad news. The outstanding position on the BSE is currently Rs 8.3 bn. The average trading value on the BSE for the month of May was Rs 14.5 bn. With 20 trading sessions remaining before the ban of deferral products, the average daily liquidation works out to Rs 413.3 m. This is a significant 28.5% of the daily trading value and could impact direction of the markets. However, open positions prior to May 15, 2001 can be squared off before September 2, 2001. Consequently, selling pressure to that extent could be reduced.

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