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Stocks

Markets have crashed, where do we go from here?

The Sensex is now under 13,000, with the last three days accounting for a 1000 point drop. This is a 7% drop in three days; and with heavy volumes.

Minor correction?
Markets usually take a breather every now and then. So this could be a minor correction. If this is the case, the markets will move up as suddenly as they dropped. But I do not think this is the case, simply because the immediate past does not show such a trend. Fast drops are followed by slow rises. The big factor here is that there is a lot of fear and doubt in the minds of people, and it is reflected in sentiments expressed in TV channels, and the fact that mutual funds have not been buying heavily (although they have collected tons of money).

Having said that, this may be an opportunity for them to buy. So we must get mutual fund data over the next few days to see whether they have been buying or selling, especially the “heavy cash” funds (which have lots of money but not all of it is invested in the market)

India Inc. slowing down?
The Central Statistical Organisation has reported that industrial growth in October has only seen a 6.2% rise over Oct 2005. This is a matter of concern as the growth is a lot lower than the 8-9% expected. However, the 30 November 2006 estimate still thinks India’s GDP growth will be 8.9%, which is good enough.

Global cues
Other cues include the fact that the US Fed has decided to keep rates steady, meaning they are not hiking or reducing rates. This is probably temporary, as the recent rate hikes will most likely be compensated by a drop at some point.

Japan is expected to announce an interest rate change on Friday, and that may be significant as their phenomenally low interest has caused a lot of institutions to borrow from Japan and invest in emerging markets like India. If the Japanese interest rates rise, there will be another drop in India – this will largely be “perception” that FIIs will pull out. But they won’t, because countries like India are the only places they will get a significantly higher return than average, therefore if anything MORE money will come in.

What should you do?
For the confused investor: Hold your horses. A few days here and there will not make a difference to you. Let this week by, and if the market has recovered to 13,500 Sensex levels by next week, continue your normal investment strategy.

For a value investor: Some stocks especially midcaps are quoting at extremely low levels. Go ahead and buy them.

For a mutual fund investor: Usually crashes are accompanied by huge redemptions. Hold for a week, and then think of purchasing new funds.

Regardless of the above, if the crash takes the sensex below 12,000, sell.

  • Anonymous says:

    >Hi Deepak
    Ur blog is gr8 and I’m an avid reader. Ur views abt a correction are valid. But considering that Q3 results are round the corner we can expect a consolidation. I believe the present correction is short term. We can expect a rally in early january if not sooner.
    Thnx and keep up the good work! Cheers!!!
    Vikram

  • Rambler says:

    >When you want guys to hold at 13500, why should one sell should the market go down to 12000??????????