AppId is over the quota
WE WOULD like to remind our readers of the research findings we had published a few weeks back showing that for a large number of the last 10 years stock prices have shown an uptrend between November and February. The analysis had shown that if investors bought stocks at the low of November prices and sold in February, then they were almost certain to make gains.
Like most statistical research, these conclusions too were based on empirical data and carried a small margin of error in the form of an exceptional year. However, it is interesting to note that the stock market trend so far has been in line with the findings. From sheer despondency just a week back, the market mood is turning distinctly positive. There has been good amount of buying by foreign institutional investors and domestic mutual funds.
Even daily traders and small punters are regaining some confidence in the market. Volatility in the markets is down and indices have not fluctuated wildly last week. All these indicate a better immediate future for the markets. However, investors should be cautious and should not plunge headlong into the markets.
When we believe that the markets would bottom out in November, it implies that there would be no sharp run up in stock prices. The markets have already run up sharply in the past week and there could be some amount of consolidation over the next ten days. In our opinion that would be the ideal time for investors to take some long term view on the markets. At a macro level, there are many positive indicators suggesting that a turnaround in the markets could be around the corner.
In short, we expect the broad money supply, measured as M3, to start going up in the coming weeks. It is an important indicator and must be monitored by informed investors. One of the most important factors governing trends in the market is free liquidity of money. Have seen that free liquidity fell sharply from February leading to a shrinkage in demand for stocks in the months after February.
As the oil import bill shot up and inflation rate remained high, money flows remained under pressure leading to restricted flow of funds to the market. However, that situation is now changing. We believe that in the weeks ahead free liquidity would improve leading to higher demand in the markets. In our estimate, the inflation rate has peaked after the recent oil price hike. In the weeks ahead we are likely to see a decline in the inflation rate. Also the impact of industrial slowdown would be reflected in a decline in credit growth to industrial sector.
This would increase money supply with the banks and lead to higher flows into the markets. Also central government has already raised nearly 85 per cent of its targeted borrowings for the current financial year and therefore, if there are no last minute splurges, government may not be a big borrower in the months head. This should allow more money to come to the markets.
Also fund flows from the India Millennium Deposit scheme would add to liquidity in the system, provided RBI does not sterilise these flows from local markets. The relative slowdown in industrial activity would also pressure non-oil imports and in case oil prices head lower, as looks likely, the forex reserves could really rise. Also we are in the traditional FII buying season.
A look at the last eight years data shows that October has almost always been month of FII selling while November to February is the period when they are usually net buyers of stocks. All these add up to substantial rise in free liquidity flows and hence more money chasing fewer assets. Readers would appreciate that ultimately it is the demand-supply equation that determines asset pricing.
Hence, if more money chases stocks in the days ahead, prices are more likely to rule firm. That is our reasoning for recommending a buy in the days ahead. Of course, the recommended strategy is to buy on the dips, that is buy when the indices fall. This is a distinct shift from the bear market strategy of "selling the rallies". We also believe that in the forthcoming rally, the old economy as well as new economy stocks would move.
Investors with low risk profile could opt for old economy stocks in growth sectors while the big risk lovers could continue to dabble in technology stocks. But look out for convergence stories, companies where old economy and new economy are merging could be the new blue eyed boys of the market in days ahead. For more information on this theme read on a site financialanalystreview.com.
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