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Monday, Mar 22, 2004

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Markets to sail with volatility

Jayanta Mallick

A systemic lacuna, the absence of delivery obligation, has been used to the hilt. The challenge posed by relative slowdown of liquidity has been turned into an opportunity.

A PUBLICATION of the Morning Star, Wall Street's navigation expert, has given tips to lay investors for avoiding fund industry scandal, which it thinks, is not over and out yet. One may regret that such piloting services for funds and equities are not available on the Dalal Street where the retail investors at present are weary of sudden emergence of selling in the cash and derivatives market.

On the surface, it is a mere technical correction in a long bull market. However, as you go deep, the perfectly legal selling binge may not be a whale of a development for the schools of small fish.

The Deep: Couple of weeks ago, the Union Disinvestments Minister, Mr Arun Shourie, cried foul over the selling by (apparently known to him) a "bear cartel". But, he stopped short of spilling the beans.

The SEBI and the RBI along with surveillance teams of stock exchanges were supposed to be grappling with the development of the February-March. As the disinvestments of PSU passed off peacefully, the focus on the issue of a continuing selling carnival has dimmed.

There is an appearance of a changed game plan in the short-run for the bigger players among the market tribes. The selling strategy, which has emerged in cash and derivatives (higher in the latter), suggested a method in madness.

A systemic lacuna, the absence of delivery obligation, has been used to the hilt. The challenge posed by relative slowdown of liquidity has been turned into an opportunity.

Here goes the seamless action plan; sell short in the derivatives, particularly the stocks futures, keep the prices in the cash segment down through supply management till derivatives contracts expire on March 25 so that settlement prices are kept low (for that you do not need to invest, instead money can be mopped out from cash segment) and the selling volume difference in favour of futures contracts will ensure clean profits with least investments. Only rider, those with deep pocket and has the ability to move quickly with volumes, could adopt in the strategy.

The operators, corporates, high net worth individuals and some of the institutional investors seem to be have been following the strategy. It's a win-win situation for both bears and the bulls.

For example, in the last two weeks of trading, on two days (March 10 and 9), the FIIs, sold more than they bought in the stock futures, while they maintained the net positive investment figures slightly subdued in the cash segment, except for one day (March 8).

A chief investment officer of a foreign fund admitted that such a strategy was adopted by certain overseas funds because of the liquidity pressure faced by them (this could be for the subscription in the PSU divestments or redemption pressure or simple year-end consideration of the local outfit). However, one thing was clear from the weekly investment data that a sudden rise of interest in debts in the previous week, waned substantially last week.

The possible catch: This week, the secondary stock market is likely to remain volatile. The cash segment may see investment volume coming down on funds shortage. The activity in the stock futures is likely to dominate the cash segment trading strategy. Price line for the key index stock may remain under pressure.

This may induce certain bargain hunters to seek opportunity. They, however, may be a minority and may not be able to change the direction of the market significantly.

Though, the long-term economic and market outlook has not turned negative. But, a few dark clouds are gathering over the horizon. The rising trend in the petroleum and coal prices globally is one of them. At home, election dust will continue to blur vision for the next couple of months.

The great outsourcing saga for the domestic services and manufacturing sectors, that has been unfolding, is likely to go through dramatic twists and turns in the next few quarters.

The sailing for the India incorporated in the next three to four quarters, thus, may not be as smooth as one would have thought in the early part of bull run.

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