Although a majority of participants expect a correction, the markets seem to be unrelenting. Over the past two months (November 16, 2009 to January 14, 2010), barring a few sessions, the benchmark Sensex has been trading in a tight range of 1,000 points: 16,600 at lower levels and 17,600 on the upside. Interestingly, the cumulative turnover of Sensex-30 stocks to the total turnover of the BSE has fallen to a five-month low of 17 per cent from a high of 52 per cent seen on November 6, 2009. The data clearly indicates a shift in activity to non-Sensex stocks and improved risk appetite owing to higher retail participation. In fact, in the past 13 consecutive trading sessions, the ratio of traded Sensex stocks to the overall turnover has stayed below 22 – levels last seen during the peak of January 2008 and also during January 2007.

During the two months up to January 14, 2010, while the Sensex gained just 4.4 per cent, 360 of the broader BSE 500 stocks outperformed the benchmark. The highest returns were clocked by Ashapura Minechem and Bharti Shipyard, which gained 93 per cent and 83 per cent, respectively. Almost 168 companies of the BSE-500 gained more than 20 per cent in these two months. According to players, there are a couple of reasons that has led to the outperformance. Investors, who missed out on the initial rally since March 2009, which was driven by large caps, have been playing catch up betting on mid-caps and, of late, small caps. Further, liquidity was abundant and mid-cap stocks were quoting at 50 per cent discount to their 2008 prices.

Lead, lag

The last time when the ratio of Sensex stocks’ turnover to the total turnover of BSE dropped below 20 consecutively for more than 10 days, the markets took a beating

Source: Bloomberg; *Ratio of cumulative turnover of Sensex stocks to the total turnover of the BSE

But, going ahead, experts believe caution is the watchword. Says a fund manager and PMS head with a domestic brokerage, “This is a typical data point where you see large caps static and every day some unheard name topping the gainers’ list. At this point investors need to increase their cash levels and rebalance their portfolio with a higher weightage in favour of large caps.”

Concurs Ashok Jainani, head of research and market strategy at Khandwala Securities. “Statistics do not lie. Given that a chunk of FII inflows has gone into qualified institutional placements and frontline stocks, B-group shares are rising purely on retail euphoria. In the past, such retail momentum has coincided with market tops. Hence, investors need to be wary.”

So is the story over? Well, “No,” says Shrikant Chouhan, senior vice-president, technical research at Kotak Securities. “The situation is akin to January 2007 than January 2008. In January 2008, most non-Sensex stocks had reached 95 per cent market wide limit in the F&O segment and people were highly leveraged. In 2007, at 14,500 levels people were cautious and expecting a correction. Though the markets did correct by 15 per cent it bounced back to make new highs.”

While experts advocate avoiding equities at current levels, they believe any decent correction should be an opportunity to raise equity exposure, since it could yield healthy returns in the coming 12 to 18 months. So while the ides of January may still be in question, the falling share of Sensex stocks to the total turnover indicate we are heading south.

Risk/Reward

• 7.31% India’s annual inflation rate based on the wholesale price index rose to a 13-month high in December from 4.78 per cent a month earlier. The headline inflation rate was 6.15% a year ago. The sharp rise is mainly on account of sharp rise in prices of primary articles and a low base effect.
• 18% The growth in India’s exports sector in November 2009, after staying in the red for 13 months. The value of exports in November 2009 jumped to $13.19 billion compared with $11.16 billion in November 2008.
• 3-5% The expected growth in India’s gems and jewellery exports in FY10 higher from the $25 billion in FY09. The Gem and Jewellery Export Promotion Council said growth in demand from China and Russia is likely to remain strong.
• 13% The growth in India’s cement production in December to 13.91 million tonne, according to the Cement Manufacturers’ Association. Despatches in December grew 13.2% on year to 14.13 million tonne. Sequentially, output and despatches in December were up 11.2 per cent and 13.4 per cent, respectively.
• 10% The expected decline in ex-mill sugar prices to Rs 34-35 by end of January. The Maharashtra State Cooperative Sugar Factories Federation expects prices to stabilise around these levels for six to eight weeks on poor consumption demand.

Source: NewsWire 18