Since the beginning of the bear market since late 2007, the BSE index SENSEX has been falling with small breathers of trading in a range sometimes and still smaller bump up which did not sustain. Most mini rallies the stock market has witnessed have quickly dissipated in the face of bear hammering.
In the last couple of trading sessions the Indian stock market is yet again making another attempt at a rally. This rally has come at the back of remarks from bank CEOs and economic data that has led investors to believe they'd gotten too pessimistic.
The BSE is following global cues as the Dow Jones industrial average rallied for four straight days from nearly 12-year lows, and gained 597 points, or 9 percent — its best week since November. That followed a two-and-a-half month drop in the Dow of nearly 25 percent
According to Tobias Levkovich, chief U.S. equity strategist for Citigroup "People have been worried that we're heading into this abyss ‘but’ there are signs that that's not the case, and there is some floor somewhere — that we may have overreacted."
The question top most on the mind of stock market investors is that if the worst really over?
There's no formula to find out if this latest rally will sustain. But market analysts are watching closely for signs that the worst might be behind us, and they say some good signs are starting to pop up.
"There are little subtle things that have happened that are good — good enough to see that market is trying to establish a near-term bottom," said John Kosar, market technician and president of Asbury Research in Chicago. "But it's way, way, way too premature to try to make an argument that this is 'The Bottom.' "
So what are the signs a prudent investor would look for to find out if the stock markets have bottomed out and what would indicate that there might be more down side yet?
FIVE SIGNS INDICATING THAT STOCK MARKET MAY HAVE BOTTOMED OUT:
1.Spurt in volumes:
According to stock market experts the two signs of a bottom are the entrance of big institutional investors like FII’s and Mutual Funds, because they hold stocks for the long-term and high trading volumes during rallies. The current rally has both these elements.
FII’s, Pension funds, mutual funds, and insurance funds began snapping up bargain stocks last week after sitting out on the side lines for quite sometime. The volumes on the BSE and NSE have picked up and the volumes on New York Stock Exchange were about 7 to 8 billion shares which are similar to those when stocks plummeted earlier.
2.Things could have been worse:
Indian public sector banks are in fine shape and the retail segment is picking up. Interest sensitive sectors like real estate and autos will pick up as banks cut interest rates following RBI’s lead.
Even the U.S. economy, although in a bad shape, is not the same as the Great Depression of 1930’s. Unemployment in the US is at 8.1 percent, and expected to rise above 10 percent, but that's nowhere near the 25 percent level experienced in the 1930s. And today, when people are fired, they can collect unemployment.
3. Safe Banks
Unlike the US Indian banks were not affected badly because of government policies. Even the private sector banks have held up with marginal losses. Banking sector is the back bone of credit flow for industry.
The current rally in global stock markets began when three U.S. banks said they've actually been profitable so far this year. They're also borrowing less from the Federal Reserve now. Bank borrowing from the Fed fell to $19.6 billion last week — the lowest level since Lehman Brothers collapsed in September.
4. Stable commodity market:
Although it seems weird but stock investors should be happy that oil prices aren't falling anymore. After massive price drops alongside stocks over the past several months, crude oil has jumped 16 percent in the past three weeks.
Crude oil and copper — which has risen 17 percent in three weeks — tend to be economic barometers. That's because if the cost of industrial metals and crude oil are rising, it means traders see demand trickling back. Growing demand means increasing industrial production.
5. Fresh money waiting
Most stock investors are talking about how they've moved into cash as the markets tumbled. Certainly, the financial crisis proved that stock experts and analysts aren't all smart. But it's usually a good time to buy when most people are saying they've cashed out. The reason for this is that masses are usually wrong about stock markets. They bail out too late and they reinvest too late.
FIVE SIGNS OF GLOOM
1. Credit crunch:
The U.S. banks may not be wiped out, but they're still in a bad shape. Same goes for the complicated credit markets. JPMorgan analyst Thomas J. Lee noted that the markets for securities backed by residential and commercial mortgages have recently deteriorated to their worst levels since Lehman Brothers' bankruptcy.
The market needs a plan for these "toxic assets" — either by selling them to private investors, or allowing banks to mark them differently. A failure by the government to deliver such a plan sparked a sell-off last month, and if investors don't get one soon, the market could be in for another tumble. Analysts aren't ruling out a Dow drop to 5,000, or an S&P decline to 500. This would have serious implications for the Indian stock markets also.
2. Small up moves:
The graph of falling economy is never in a straight line. The recent spate of better-than-
Sandeep Dahiya, a finance professor, said he wants to see three months of sustained increases in the Conference Board's consumer confidence index. It is currently at the lowest levels since the gauge started in the 1960s.
To really know that we are out of the woods we need sustained up move in production and consumption for at least three consecutive months. Until that happens we can not be sure that things have turned for the better.
3. Short covering rally:
Most experts believe that main reason for the current rally is short covering by bears as the stock markets were in over sold zone.
It's difficult to differentiate between short-covering and regular buying. In the US floor traders last week estimated that between 50 percent and 60 percent of Tuesday's 379-point jump in the Dow was due to short-covering. And a rally driven by short-covering can disappear quickly when any bad news flows in.
Short covering could be the main reason for the current rally in Indian stock and in that case this rally will fizzle out soon.
4. Political uncertainty:
The general elections in India are around the corner and no one can predict the out come. Stock markets would not mind a UPA or NDA government. The policies of the BJP and Congress are not much different on the economic front. A clear victory for either of the parties would trigger a rally across the board.
It is the third front which includes the communists that can spook the Indian stock markets. Although none of the forecasters believe that the third front will be able to muster up the numbers to form a government still the fear of the unknown is always there.
The Stock market fears something wildly unexpected could happen. The Sept. 11, 2001 terrorist attacks threw a wrench in the market's recovery following the bursting of the technology bubble. And an unintended consequence of addressing the Great Depression with protectionism in the 1930s was global trade war, which hampered the U.S. market's recovery.
5. The Satyam spook:
Even if you did not hold any Satyam or Maytas stocks you are still a victim of the fraud to some extent. The confidence of the Indian investors has been rattled. When companies of the stature of Satyam can swindle investors who can you trust?
Retail investors who have been burnt badly in the current meltdown will think twice before investing their hard earned money in the stock market. It will take some time for their confidence to return.
The Indian economy might be down but it is not out. The government spending on infrastructure and power continues in a big way. The rural economy will probably sustain the FMCG sector. Service and manufacturing have suffered because of global melt down but even there the signs of revival are beginning to surface.
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