The Hindu Business Line : Benchmarks may see correction

Equity markets have the nasty habit of correcting at odd times and catching you off-guard. Many would refuse to recognise the rising risk as it grows with indulgence. Some would prefer to live with doubts. But it strikes just when you willy-nilly suspend your disbelief after several misapprehensions.

Market intelligence suggests that the Dalal Street party may be off pretty soon. But why someone would listen to such an apparently dramatic call when the Sensex has not snapped its winning streak and its P/E was way below its historical peak above 50? Not only market metrics, but also economic and financial imbalances, created by the rising equity prices along with other asset prices, are conspicuous of their absence.

The technical analysts seem to indicate a bounce-back in key indices from their nearest support levels. Corporate fundamentals too do not appear to be hurtling down in a hurry.

Twist in the tail

Twist, perhaps, lies in the market tail. The retail investors, the base of the market pyramid, have begun to be haunted by fear of losing money in small and penny stocks.

To top it, the market intelligence suggests that the operators are overstretched.

Going by the market wisdom, like in jungles, instinct at times rules over the unwritten behaviour rulebook on the equity street.

If fear psychosis takes over, then negatives, which are normally ignored in a bullish scenario, get blown up.

In the last two months domestic liquidity has been driving up the valuations. The momentum, however, ignored vulnerabilities. As return appetite increased, possibility of better reward dropped with higher valuations.

The last fortnight saw the exit opportunity in the counters, which formed part of the broader indices and beyond, get narrower.

While the institutional investors are better equipped to handle such a situation and move over to the sidelines after cashing out, if necessary, large number of equity investors find themselves on a sticky end of a momentum play.

FIIs to slow-down

According to indications, the overseas investors may be slow in making fresh allocations in the near term in view of relatively lower return prospect. For the momentum game, this would surely be a bad news.

This week, in a pure turn in the sentiment, it would not be surprising if the Sensex corrects more than 10 per cent. It is futile to say that the market may witness higher volatility.

To contain the impending correction, market needs overpowering dose of inflow or a number of positive developments or resurgence of greed.

(Response may be sent to jayanta_mallick@the hindu.co.in)