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Virendra Verma

WHEN everybody turns bearish on the stock market and yet the stock prices fail to fall, then what can be done? That's the biggest question that has been lingering on the minds of everybody in the stock market. Last week was no different.

Another interesting aspect was that small-cap stocks and even micro-cap (category below the small-cap) were full of bullish sentiment. A good indication of this was seen on Friday when 345 stocks hit upper circuit, which means that almost every 7th stock traded on that day had only buyers and no sellers.

On the contrary, key indices - the BSE Sensex and the NSE's S&P CNX Nifty - remained weak. The Sensex fell by around 100 points from 7780.76 to 7680 and the Nifty by 26.4 points from 2383.45 to 2357.05.

These two trends show that majority of the market players are bearish in the short-term and have put a caution on the future investment strategy. Last Monday, UBS came out with a report stating that Indian markets are the second most over-valued in Asia. This is based on price-book value and return on equity model. Their analysis shows that markets that are high on these parameters have failed to give positive returns in the next one year.

There are other foreign broking firms which have alsoturned bearish on the Indian equity.

The FIIs' inflows too have slowed down and on some days negative inflows were seen.

But one positive development was the SEBI's decision to increase the public float to 25 per cent in the companies in the next two years. So, companies such as Wipro should increase their floating stocks due to this decision.

A market with higher float gets good valuation. But this will not apply to companies such as ONGC as they are Government owned. But in general, this is a positive development and should have a positive impact on stock valuations, which have lower float (less than 25 per cent).

But the big negative news ignored by market last week was about the disinvestment plans announced by China. If the Chinese government is committed to raising billions of dollars through it and invites foreign participation then that could be a big setback for the Indian stock market.

In this backdrop, what will happen this week? Most of the analysts at the end of the last week were still cautious and had a negative to neutral view with bias towards bearish trend. However, smart traders who have still high leveraged positions said that market has always favoured the contrarians, which means when everybody expects stock prices to fall, they don't. This could happen next week also.

With no major corporate announcement expected, the stock price movement would be more on technical rather than fundamentals.

Among the stock-specific developments, the Flex Industries stock moved up sharply last week. Similar movement was seen in India Glycol. These two Delhi-based companies have seen a lot of rough patches in the past and have recovered from them. But now one has to see whether the contrarians approach work, this we will come to know by next Friday.

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