Quick edit: The capitulation did not happen this week. Nerves cooled down and value investors were busy buying selectively towards the weekend. As the markets head into the last trading week, we can’t help wondering aloud if the direction will reverse earlier than what most investors believe it will. The consensus view seems to think that stocks will drop significantly from the current levels before bouncing back. The markets haven’t really seen too much FII selling in December 2011. The prospect of FII’s switching tracks in the New Year can’t be ruled out and current valuations as well as exchange rates favor a revival of buying interest. FII’s started the year 2011 on a selling spree which took us all by surprise. 2012 could well see them spring a buying surprise on the Market. Smart investors can buy into value in the last week of 2011.
Impact: Economic data has its own way of driving sentiment. Positive data flows can reinforce investor’s behavior significantly. The first signs of positive data showed in the food inflation numbers which softened significantly. The trends clearly indicate that more data will show greater positivity in the coming weeks. Inflation will start to trend down leading to the first drop in interest rates. The exchange rates have also settled into a range after a volatile phase. The weak rupee has many ramifications. Exports will certainly get a fillip. The exchange rate has made it ridiculous for FII’s to sell at these valuations as they face the prospect of a 40% capital loss on the Sensex for 2011. With data that releases in early 2012 likely to positively reinforce sentiment, the negativity that prevails may well get gradually shaken off. We are headed into interesting times when Mr. Market makes up his mind on direction.