Market Correction May Not Be Substantial

It’s almost becoming a trend. Ashwini Sharma, a management graduate working with a broking firm, booked profit as he expects the markets to fall. His friend Gunjan Khare also booked profit partially. The reason for selling their stake was the same. They are afraid about the fast recovery of the stock market. Also, they don’t see any major trigger for the market to move up.

And they’re definitely not the only ones; most industry experts with a few exceptions are expecting a fall, specially in view of the super fast recovery of the markets. And there are several reasons ranging from domestic to global, for a correction to take place, they feel.

First, the bad monsoon. During the last few months FMCG stocks appreciated on the expectation that the bad monsoon will push the prices of their products up, which will increase their profitability.

However, a sustained low rainfall can also increase their input cost. According to a broker, agriculture related companies might have gained on the products, which have already been produced. But their input cost is likely to go up on low production of agri commodities.

In fact, many companies have already started feeling the pinch because of bad monsoons. In the last six months, FMCG companies have been notching up decent growth but in July 2009 their growth has come down to around 13% from high double-digit levels.

However, the actual impact of poor monsoon will only be visible after a lag of a few months. Says, a report of Angel Broking, “The emerging drought situation carries a downside risk to our estimates, both in volumes and in pricing, as rural consumption takes a hit, albeit with a lag effect of three to six months.”

Most blame the sharp recovery for the expected correction. According to an equity broker, the Nifty has recovered around 90% from year lows while other Asian indices such as the Hang Seng have risen more than 60% from their lows. The Dow, too, has recovered around 50% from its March lows. However, this rise seems to be happening too fast.

Therefore, Nifty may start consolidating in the range of 4,300 on the downside and 4,900 on the upside with a negative bias, which means probability to come down is higher.

According to Saurav Arora, senior VP at Jaypee Capital Services, the Nifty has very strong resistance at 4,730-4,750 levels. “I think we have already seen the highs for the year and if we can hold 4,000 levels that would be good. At current levels, valuations look a bit stretched,” Arora said.

According to Arora, a study of Dow’s performance over the last 50 years shows that if the index in the end of August is more than what is in January, June and early days of August, it signals an imminent fall in the following month.

Of the 17 times such condition arisen, 14 times the index showed an average decline of 1.73% in September. The only positive Septembers under this scenario were in 1963, 1983, and 2006. The Indian markets are in a similar situation.