How bears are keeping bulls at bay

Last December, GSK, a prominent broker, started short-selling in the market. And there were a large number of big companies in his list including DLF, Tata Steel, Reliance group companies and many others. Though the market continued its northward run, he kept his faith. Today, with the market down almost 40 per cent from the January highs, GSK is sitting on huge profit.

The last few months have been especially good for him. With most prominent companies being hammered because the outlook on their sectors has changed within months, many of GSK’s calls proved to be right.

GSK isn’t alone. There are several brokers who turned bears quite some time ago. They believed that the subprime crisis would sooner or later hit Indian shores. According to sources, during the September-December rally, when many investors and small brokers jumped on to the bandwagon in a big way and were pushing up shares prices to unrealistic levels, these brokers were watching the developments carefully.

Many were even trying to talk down the market, but there were no takers for their views. When the Securities and Exchange Board of India (Sebi) put restrictions on participatory notes in October, there was a slight blip. The Sensex slipped to 17,000 levels for a short time. But the rally was back with a vengeance.

As a result, some of these bears lost serious money. This January, a prominent bull, who had turned bearish on select stocks, found himself in deep trouble. The reason: his inability to give delivery of shares, in which he had short positions. He was forced to go to the promoters of these companies for a compromise deal, which came at a whopping sum. Market sources say the damages cost him over Rs 400 crore.

However, in the bloodbath since then, he has recouped his losses and added to his kitty.

The story has been good for the bears since then. After the sharp dip between January and April, the Sensex recovered to 17,500 levels in May only to find that the short sellers were ready for the next round of slug fest. This led to a further dip in the index to 12,600 points by mid-July. Since then, a lot of bulls have tried bottom-fishing with the belief that the domestic indices are grossly undervalued. But they have been kept at bay by bears with serious short positions in real estate and banking stocks.

And they have been rewarded by continuous bad news from the US market like the fall of investment bank Lehman Brothers and commercial bank Wachovia. And even domestic good news like the passing of the nuclear deal and slight dip in the inflation numbers has not been able to bring cheer to the market.

If market sources are to be believed, a whole lot of brokers are taking cues from these senior brokers. One prominent broker, for instance, has recently reversed his long positions in banking, engineering and commodity stocks with their help.

As things stand now, expect this action to continue for some more time. Sources say that the strategy is to go short until the liquidity conditions in the system improve. During this period, even brokers, who want to play long, will find it difficult to get funding to finance long positions. Once liquidity conditions improve, the same bears will turn bulls.