Sensex gazing is what most investors do all the time. One number gives them all the comfort or otherwise about the stock market. While there is no denying the ease and convenience of following a number, it is not quite a sufficient indicator or guide for investment decision making. The reasons are not too difficult. A few widely owned companies can easily distort the sensex especially when they are performing exceptionally well. Widely owned companies have low promoter holding and high public float. This gives them disproportionate weight in the sensex and moves in these stocks can swing the sensex much wider than the broader market. This is the phenomenon of every rally in the index. The rally often fizzles out when several sensex stocks lose their earnings momentum and the sensex is unable to withstand the earnings shock. Another factor that spooks a rally in the sensex is index selling by ETF’s. Global ETF’s have become major players in emerging markets and prefer to use ETF’s for investing in them. This makes the markets vulnerable to bouts of both buying and selling, Global investors have begun to infuse volatility in emerging market indices because of the huge sums of money they move in and out of them in short bursts of time. Aggressive buying can pull up markets faster while aggressive selling will lead to sharp sell-offs. These sharp moves really don’t have much to do with the actual earnings of companies or their future potential. In times like these when the Emerging market ETF’s are getting sold off aggressively, investors would be wiser looking at specific parts of the market which offer good bargains. A sell-off by ETF’s is a great opportunity to buy equities at bargain valuations. That is something a long-term investor must not let-go. The fact that global investors are selling aggressively is not a factor that should decide a domestic investor’s strategy. It is time we learn to have a mind of our own.
“There are no sure bets in the world of investing; there is risk in everything. Be prepared for the ups and downs.” – Jim Cramer