Big bang gain?

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May 18th, 2009 BG Shirsat

Led by a landslide victory by the Congress, the UPA has returned to power, with a strong coalition that removes a huge overhang among investors. I had indicated in my previous blog that markets will revisit October 2008 lows if the new government has to take support of the Third Front, which includes Left. The Indian voter turnout to be smarter voted for stability, defeated communal forces and sideline Left for their anti-development economic policies.

The expectation from the new government is reflected in the first trading day after election results on Saturday with the benchmark indices frozen to upper limit of 15 per cent in just nine seconds and trading was halted for the day. Investors now expect big bang economic reform with key pending bills such as insurance and pension to be passed. The market expected to be firm from here and the FII inflows expected to increase due to political stability.

If the corporate earnings cycle improves, we may revisit January 8, 2008 Sensex high of 21,000 any time in the next 12 months. Most US macro data and credit market indicators are showing some improvement. However, incremental gains are modest and indicate continued growth contraction ahead following two quarters of GDP decline of -6.4% (QoQ) and -6.1% (QoQ) during the fourth quarter of 2008 and the first of 2009.

However, the historical evidence shows investors entering the equity market at lower level get a market return of over 50 per cent within six months and the recent slowdown considerably thereafter. Investors entering the equity market after 150 per cent performance get a modest return after three-five years. According to a Credit Suisse report, if you buy the market after a drop of 40 per cent, the probability of posting a positive return after three years is over 70 per cent. After five years, it goes up to over 80 per cent, against close to 40 per cent if you buy after a long rally.

The Sensex has appreciated by 75 per cent in two months from its low of 8,160 on March 9, 2009. So, the short-term upside is limited and for long term gains, economic recovery is the pre-condition.

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2 Responses to “Big bang gain?”

  1. b j naik Says:

    i got atleast 25 messeges yesterday,saying that tomorrow it will go upto 1000 sensex points,i sent only one liner….where were all these guys in oct-08,,,where were they in march,,,?? they all were calling 1800 nifty ,,,and in march all were calling the rise as a simplr bear market rally,all gorgot one very simple commonsense fact that markets ALWAYS discountS future…for major economical turnings market discounts future 6 months to 1 year ahead.and today morning,(its too early though),singapore nifty is being traded at 4053…A HUGE 368+,this will be a massive gap up opening,if it realy happens.and now after a rally from 2535 to 4000,,i DONT think any analyst will be saying that this is a bear market rally.
    the fact is that ,,,even this (market discounts future phenomenon) have its limits…u have to learn to apply it ,sometimes not the 100% portion of NEWS or FUTURE EVENT is discounted in prices ,but we have to keep in mind that there may not be a MAJOR FOLLOW UP NEWS to fuel the markets up and up
    so all in all …i have over the yrs came to conclusion that instead of guessing ,,,we must and must learn to let the charts speak,,and we have to listen them.
    on 29th march ,when nifty was just around 2900,i wrote, THAT LOOKING AT THE STRENTH OF THIS RALLY JUST BEFORE THE RESULTS, WE CAN PRESUME THAT A STABLE GOVT. WILL COME TO POWER AND THERE WILL BE NO PLACE FOR MAYAVATI AND SO CALLED THIRD FRONT…the reality is ,,there is INFACT no place for mayavati and third front.
    how could i was able to write it ?? ,very simple commonsense logic..charts reflects mass psychology, and answers to 2 questions are same, who votes ??and who trades ?..THE ANSWER IS COMMON MAN.
    MY SALUTE TO THE GREAT SUBJECT OF TECHNICAL ANALYSIS AND THE INDIAN COMMON MAN !!

  2. Omigosh Says:

    Sensex 21,000 in 12 months? glurb, glurb, cough, cough… sorry, twas m’cuppa.

    Another peak would depend considerably on the hand the dreamteam chooses to play (if not fully display). There’s target 272 2014, but there’s much that could be done to scale the 9% plus trajectory. Good thing is, the delusion that there’s no tradeoff at all has faded away

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