The Hindu Business Line : Correction may check rally

THE stock market changed its course last week. It also seems to have left behind the worries over the elusive bottom. The talking point this week is the possible depth of the oncoming correction after a fairly steady rally.

In the last six straight sessions, the Sensex has gained 155.05 points. The benchmark index rose by 107.70 points in the four sessions of the last week. A correction, so to speak, is on the cards this week. But it may not reverse the trend of a gradual rise in the priceline, unless of course there is an undiscounted negative development.

The emerging theme of IT outsourcing from India by the US and European companies has caught on. Along with that, bank counters have started rolling on, over the expectation there will be a clear direction in the efforts at resolving the nagging problem of non-performing assets. The auto sector stocks are still a high on improved sales. Select old economy stocks with good fundamentals have also turned active. These are the symptoms of a broad-based rally in the offing.

The market psychology has so far turned towards revaluation primarily on the back of trading and speculative support. The fund managers, however, have restricted themselves to churning portfolios. The institutional investors are likely to book some profit and test the market level this week.

Who will play the bull then? Going by the trend, it may be assumed FIIs are not in a hurry. The retail investors are likely to wait for further confirmation of an end to three-year-long bear phase in the domestic capital market. That leaves the speculators to take the lead further this week. The settlement of November futures contract will lend volatility to the cash market.

The current rally began a fortnight ago with the top three IT counters — Infosys, Wipro and Satyam. Last week, the rally spread to the second rung tech stocks.

Decent gains by the tech-heavy Nasdaq Composite came in handy as a sentiment booster. Most importantly, there was not much few negative news to depress the market outlook.

The passage of the Securitisation Bill in the Lok Sabha was not only a positive factor for banking stocks but also a reassuring one for the stock market. "At a time of indecision, roll-back and mismanagement, it's a pleasant surprise from the political establishment. It would prove to be a solace to the battered market confidence," commented a BSE broker.

The liquidity flow has improved for the equity market. However, for a substantial growth, the market may have to wait till December. Historically, for the last two decades risk-adjusted returns were best in the months of December, January and February in tandem with improved fund flow.

According to Mr Ritesh Nair of Anagram Stockbroking, the absolute rate of return of the Sensex between October 1 and November was 6.10 per cent. "This works out to an annualised return of 63.6 per cent. With a standard deviation of 5.1 per cent, the risk-adjusted return of the Sensex during the period comes to around 11.29 per cent, which compares favourably with the risk-free returns of 6 per cent available from T-bills of one year duration," he explained.

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