Market likely to be choppy, but traders see no major correction

Equities may remain choppy in the shortened trading week ahead, in the absence of any major trigger for sharp movements either sides.
Despite concerns about stock prices being stretched, after more than doubling since March, market participants do not see any significant declines, as expectations of a correction in recent weeks have resulted in a sizeable creation of short-positions in futures and options.

Traders are likely to reverse these short-positions on every drop to lock in profits, thereby cushioning any major fall near-term, they said. Financial markets will be shut on Monday and Friday due to Dassera and Gandhi Jayanti, respectively.

“I am optimistically cautious about India, because, so far, there is nothing that indicates that the recent rally is not sustainable,” said Angus W Stening, CEO-Asia, Pioneer Investments Management. “Valuations of Indian equities
at these levels are still not near their historic higher, but they are not cheap either,” he added.

Analysts estimate that the Sensex is trading at roughly 15 times 2009-10 expected earnings. At the peak of the bull run in 2007, the index traded at over 18 times future earnings estimates. Pessimists argue that existing valuations are not comparable with that in 2007, as India economic growth then was 8-9%, while now, it does not exceed 6%.

Market participants said the July-September quarter earnings season next month will help investors judge whether corporate earnings growth has revived or not. With no key disappointments in companies’ earnings in the April-June quarter, there are expectations of an improvement in the current quarter.

After the recent rally in software shares recently, sparked by reports of top companies looking to hike salaries, a section of the market has turned pessimistic about the sector. Bank of America-Merrill Lynch, in a recent report, reiterated its ‘underperform’ rating on the sector. The bank said, “The market will be disappointed in the near term on margins, and in the longer term, on revenue growth trajectory.”