ithought market wrap No. 45, 30 Aug 2011

Quick edit:
The valuations of most companies have cracked. In every bear market, the last phase is when the usually invincible ones start to show vulnerability. There are adequate signs of that happening. Investor sentiment tends to hit an all time low around the same time when the best companies hit their 52 week lows. When blue chips start falling, investors run away from the buy side. As the prices drop further, retail investors actively sell their portfolios and exit the markets. The next bull market is usually born around this time when there are hardly any buyers and sellers predominate. Successful equity investing is about thinking contrarian during this troubled phase and deploying monies in equity. Watch the New lows list. As the list gets longer, take it as a strong buy signal. Your wealth creation from the next bull run begins there.

Global fund flows tend to distort prices and believe the fundamentals of the companies. September saw sustained outflows due to FII selling. DII’s tried to absorb them and their buying cushioned the fall in the indices remarkably. Retail buying is limited to the HNI’s and even they have tired themselves out. So, where is all the money going? Have the famous Indian savings shrunk? An innocuous statistic from the Government that its small savings collections have shrunk only adds to the confusion. The savings are mostly going into gold and homes and the prices of both asset classes are near their all-time highs. Given that FII’s are selling and retail money has its sight set firmly on other assets, the indices have actually held quite well. We believe that any sharp fall in the indices will be short lived. The markets have enough strength to recover and stay range bound.

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