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Market during festival

 

Festival seasons follow immediately after monsoon. For an arid country like India, monsoon means more than rainfall. It means a choice between survival and extinction for few unprivileged in rural area while it becomes a reason for food inflation to jack up or remain stable. In India, even monsoon needs a precision of a compass, a drop less and we are staring at drought like situation and a drop more and we confront flood. Under these uncertaininties the stock market is generally watchful during the months of July and August. It wants to see the extent of drops, measure of shortage or excess and then once all is said and done it takes a decisive step.

 

Historically, monsoons are 80-110% normal in India, and that is kind of accounted for in stock and commodity prices. The euphoria is dependent on whether it is in range of +/-5% to 100 marks or is in 80-90 range. These percentage points would be of little consequence for an exam marks but for monsoon it can be detrimental. FMCG stocks tends to react positively for a good monsoon – although there is no worthwhile reason stating why they should or shouldn’t react – but it has more to do with seasonality observed by charters over decades rather than anything simply economics.

 

Pharma stocks esp. those related to water borne diseases rise during monsoon esp. if there are flood situations and cholera/dengue and such diseases take big proportions. Navratri seasons leading upto Diwali is a chase of auto, realty and Gold. Retail is generally found waiting for these auspicious times to buy these precious assets ignoring the all time high prices in these asset class during these time – but they liquidity always has the final say in demand and supply rather than rationale.

 

Good weather in northern hemisphere coincides with the festival season and in general tourism, airline and hotel industry are hot. Same goes for retail industry esp. the apparel and electronic goods version of the same. These sectoral movement gives us the semblance of seen that – been there syndrome. Markets hit all time year highs generally during these times and yet the buyers queue up at the slightest opportunities.

 

Typically this year in an Indian context monsoon has been good barring the states of Bihar/Jharkhand and few others. It has been too much in states like Haryana and Western UP incl. Delhi. Delhi received flood warnings and semi flood like situation for close to 2-3 weeks. As always Navratri saw Gold making all time highs (>20k per 10grams) and auto giants Maruti and similar reporting all time high sales volume. Generally these are good times for the market and IPO storyline Coal India leveraged it to stack up a 24x subscription.

Let’s say – the Hype is built.

 

Here lies the catch – there is just too much of FII buying over the last 2-3 months and there is hardly any exception of a trading day when FII have been sellers – DII though have been sellers on each of these days when FIIs have been buying. Here lies the paradox – why is FII buying aggressively while DII is selling. Reason is simple – FII pack is getting easy cash overseas at 1-3% APR and it is huge potential for them to invest in a Country destined for a GDP growth in excess of 7%. DII on the other hand are close to realty and believe that India is getting overheated. They want to hold cash should there is a flight of capital in case FII rushes back or redeems its profit. They want to go fishing should the water level falls below threshold.

 

Q3 is generally a realty check after the euphoria has died down and slowdown because of bad weather, budget freeze on account of year ending in US takes center stage and generally markets goes into a tailspin during these times. Market will always be smart and it will not give everyone their expectations in terms of rewards – market will shake them up before taking any definitive directions.

 

Advice for readers is simple – we are at slightly stretched valuations on Nifty stocks though the midcaps and small caps have not really participated but then these stretched valuations will eventually get a shake up and investors will get a wake up call. It is better to exit and hold in cash. Leave the compulsion of an opportunity to make few 100 bucks in case markets rise by another 100-200 points on the Nifty. The reward amplitude has shrunk appreciably and a possible bearing hug looms large –it’s no point thinking about a potential small gain for a moderate upside left in market but for every rise the chance of a deeper cut is getting amplified.

 

FII are known to exit without giving notice and investors are advised to exercise caution. Exit after reading this post rather than holding on till the time FII press the mayhem button. There will be not much to exit now.

 

If readers wants a number from me – then I am looking at an at least 500 points cut in Nifty from existing levels before we see 2011.

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