Or are the markets pausing and letting out some steam before they break out and head north again?
The BSE-30 Index has gained around 65% since the start of the year. Technical analysts -- who study the past patterns and volumes of these squiggly lines -- would be nervous that (at 15896) the 30-share BSE Sensex is below its 30-day moving average of 16805 and dangerously close (just 2% more) to its 100-day moving average of 15594.
Like the chief in the Asterix comic books, they will worry that the sky could fall on our heads. If the Index "breaks" the 15594 level and stays weak, they will start to worry that it could slip to lower levels. Like the 12585 level of the 300-day moving average.
The index may be tired after a great run up of 91% from its low on March 9, 2009, but could head higher over the next 9 months.
The Sensex is a sample of 30 stocks that sort of tells us where the "markets" are headed.
On a day when we hear that the markets are "down", we have this picture in our head that all the stocks we own in our portfolio may be "down".
On a day when we hear that the markets are "up", we feel all the stocks we own in our portfolio are "up".
While it is true that an index is "representative" of what may happen to a portfolio of stocks, the Sensex (or any index) has a limitation: of size.
By definition, the Sensex (BSE-30) has 30 stocks --- it cannot have more.
And there are a few stocks that are powerful and "drive" the index.
For example, the index lost 12,713 points from its peak to its low point (see Table 1). Five stocks accounted for 44% of this decline.
On the rebound, the index has gained 7,570 points from its low (see Table 2). Five stocks accounted for 28% of the gain.
One can infer a few things from these tables:
1. The stocks that brought the index down have not really made good all their "losses." For example, Reliance Industries' (RIL) share price movements from the peak of 2008 to the low of 2009 accounted for 15% of the decline in the index. But Reliance has accounted for just 7% of the gain in the index from the lows. Reliance, in that sense, has "underperformed".
2. In fact, that "underperformance" is true for ICICI Bank, L&T, and Reliance Communications (RCom). HDFC has pretty much made up its loss of 4% with a gain of 4%. And Infosys has been an "out performer": its gain of 5% on the recovery side was more than its loss (it did not feature in the Table 1 as its loss contribution was 2%).
3. The Big 5 had more of a role in bringing the market down (they accounted for 44% of the loss in the Sensex) and less of a role in bringing the market up (28%). So, maybe this market rise is with more depth and breadth -- more stocks within the BSE-30 with smaller weights in the index have done well. For example DLF has gained 153% in the same time period that Infosys was up 81%. But, because Infosys has a larger market cap (and hence a larger influence in the index), its 81% gain had a larger contribution to the rise of the index.
4. The movement of a few stocks can have quite a large impact on the index and the broader market -- and this gives the illusion that times are good; or that times are bad.
The movement in the markets (and in your stock portfolios) is, in the final analysis, a reflection of everything that is "known".
The pace with which foreign money enters -- or leaves -- Indian stock markets has an impact on the index.
The earnings of Indian companies are a complex interaction of India's GDP, global GDP, competition and efficiency of management, to name a few.
How we interpret the news and the events -- our "sentiments" -- come to full force in the fight between the bulls and the bears.
And, boy, are they fighting! There is a massive tug of war between the bulls and the bears, who wish to make money on short term movements. Sometimes, they switch roles in a day: a bear turns to a bull and vice versa.
But let them play their games.
The stock exchanges will now be open for another 1 hour of trading.
Look out for more breathless TV anchors as they comment on the big battles and movements in the index.
As investors for the long haul know, these wonderful graphs and tables are interesting things to study once in a while. They give us some interesting data for the past -- but tell us little about the future.
Whatever their battles, continue ploughing your money -- bit by bit -- into the stock markets for sensible long-term returns.
(The writer is a director at Quantum Advisors Pvt Ltd and Quantum Asset Management Co Pvt Ltd.Views are personal)
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