Feature: Gravity and equity markets

The amount of money required to push market up is far higher than that required to pull it down

There is something about gravity - not only does it work well in nature and physics but also in markets. The amount of money required to push the market up is far higher than that required to push it down. Markets, like any other object in nature, can fall on its own weight.

Indian markets, along with other equity markets, around the globe have been moving on steroids provided by most of the central banks accounts the globe. Even before the Federal Reserve Chairman Ben Bernanke could blow the whistle to announce that the game was over, markets interpreted his statement as an intention to stop the liquidity tap. Markets across the globe have been falling since.  

Indian markets too had risen from a low of 5,477 (Nifty) on April 10, 2013 to touch a high of 6,229 on May 20, 2013. During this rise of 751 points, foreign institution investors pumped in Rs 17,224 crore. For the next fortnight markets languished near the highs with FIIs pumping in another Rs 3,342 crore. Flows had clearly slowed down from an average of Rs 875 crore per day to Rs 371 crore per day during this lull period.

The market's reading of Ben Bernanke moving his hand to blow the whistle not only led to equities falling down, but it also signalled the end of the dollar carry trade. Interest rates in the US started shooting up and with the US 10-year bond rising above the 2.5% mark thus making it costlier for money to be moved to other markets.

Since the beginning of June 2013, FIIs have pulled out Rs 9,672 crore and pulled the markets down to a low of 5570 on June 25, 2013. In other words its took Rs 17,224 crore of inflow to push the Nifty 751 points higher, but only Rs 6,331 crore (including the positive flow in the stall period) to bring it down by 659 points.

Fear is known to be a more powerful emotion than greed or hope. Thus any adverse price movement leads to a fresh round of sell-off. This is also accentuated by triggering of stop losses and other risk management sales. The avalanche created by this fall hits leveraged positions the most.

What took the markets nearly a month and a half to build was lost in less than a month at one-third the price. This is the story of every rise and fall in the market historically, and one that will continue as long as there are traders in the market.