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Why are markets moving like a yo-yo?
Fri, 15 May Pre-Open

Whether you're a trader or an investor, you would not have missed the recent volatility in the markets. The benchmark indices are down nearly 10% from their recent peaks. Stocks in the broader universe are down more. But the fall hasn't been linear. The volatility is enough to give even seasoned traders a heart attack. When the indices swing like a yo-yo by 2-3% nearly every day, it's hard not to wonder why.

The reasons are many. Firstly, the Indian markets had received huge FII inflows in FY15. The weightage allocated to India by FIIs in their portfolios was also at all time highs. The run up in stock prices was largely due to last year's general election victory by the BJP. People were sure to become concerned if reforms did not come through. That is exactly what has transpired. Markets are rapidly losing hope of swift and decisive reforms.

However, what is it that can explain the volatility? As per an article in the Mint, one of the reasons is that the markets had been moving up on low volumes in the cash segment. This means that, at least in the last few months, speculation had taken over. Shorting in the F&O segment was the name of the game as far as FIIs were concerned. As the movers and shakers in the markets, FIIs who were spooked by by tax issues, chose to not only sell their holdings but also short the markets at the same time! It is the covering up of the short positions on a day to day basis that has been the major cause of the volatility.

Does this worry us? No not at all. We have been warning investors about this possibility for a while. We believe this is a much needed correction and will provide good buying opportunities for investors. However, investors would be well advised not to fall into the trap of 'buying the dip'. This sort of advice is floated by brokers who want their clients to trade even in volatile markets. We believe investors should invest in fundamentally strong companies run by competent and ethical managements when the stock price offers sufficient margin of safety. After having done that they should ignore the short term market volatility and remain invested for the long term to derive the benefits of compounding.

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