Shifting to ‘rotationary shorting’ mode

In the Melbourne Test of 1907-08, the English last wicket pair of Sydney Barnes and Arthur Fielder needed to get 39 runs,while the Aussies, of course, needed one wicket. Most tailenders would have tried to hit the runs off and probably got out.  After a mid-pitch conference, these two decided to 'get singles'. They held their nerves and inched to a one-wicket win, batting through an excruciating hour.

Although less spectacular, slow and steady methods can be even more effective than big hitting. Investors need to remember this at a moment when the Sensex is gaining more than 500 points a week and then losing 260-odd points in a single session.

Here’s some perspective. The market lost about 4% last week -- that’s a tiny correction compared with that in March-April 2005, when the market dropped over 13%. But a huge single-session drop makes much more of a psychological impact just as a sixer is more memorable than six consecutive singles in an innings.

There’s also been much fuss about the fact that this was the biggest single-day loss since May 17, 2004. That loss was almost 16% -- this one was slightly under 4%. The crash in May 2004 was followed by a buying frenzy.  During this one, the Indian mutual funds and foreign institutional investors stayed atrong net investors.

It’s advance tax time and the IT department believes that a few raids improve collections -- this is all part of an elaborate courtship ritual between the revenue-collection guys and the financial community.

Of course, Indian bull runs are traditionally terminated by a scam. If the raids throw up something murky and raids have an unfortunate habit of doing this, the market will collapse. If nothing damaging surfaces, traders will reappear.

In the near-term, we have chances of large gyrations next week. The market could move anywhere between Nifty 2400-Nifty 2550 (Sensex 8150-8400) without establishing a clear trend. It’s the derivative settlement in four sessions and that will add some sulphur to an already volatile atmosphere.

The overall derivative segment put-call ratios and Nifty put-call ratios are heavily skewed in favour of puts -- so everyone is bearish.

According to contrarian theory, the market will now go up because everyone who is bearish has already sold. It will be interesting to find out what the mutuals do with their new-found liberty to play derivatives but they won’t be big players in this settlement. There are too many procedural problems. 

The market may rise for a couple of sessions.  Thursday will generate massive volumes and there could be losses. Intermediate corrections often register over 10% in losses and last for a few weeks. So net losses over the next couple of weeks could land indices in the zone of Sensex 7750-Nifty 2250 by Durga Puja.

Over the next few weeks, we’ll get 'rotationary shorting'. Bears will wander from sector to sector selling and, as they lose interest in a given counter or a given sector, covering and moving on, value investors will get in. Right now, Hindustan Lever, Nicholas Piramal and ITC look about the safest havens in terms of established bottoms and strong support. The extra liquidity in ITC has come at just the right moment.

Infosys, Satyam and Reliance look weak and so do quite a few other stocks. But by mid-week or post-settlement, these equations could have changed. The FIIs and domestic institutions are restricted to a very small universe of stocks; they can’t enter stocks that are too small and illiquid.

This means that institutional ownership and attitude in big indices is key. As and when the smart money decides to move on, the market goes into a tailspin. They won’t move on until they’ve absorbed the Q2 results.

Crunch time will be that little period through Dussehra-Diwali when the corporate workings will drive the market. If the Q2 results are not below par the big guys will stay invested. If you want to fish in troubled waters, stick closely to the big counters on which they focus.  One hint: bulks deals could be a good indicator of attitude in the new few weeks. Bulk deals usually put a floor on a stock.

Feeling contra?
According to contrarian theory, the market will now go up because everyone who is bearish has already sold