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Newton's first law of motion, which states that a body will continue to remain in its state of uniform motion or rest unless acted upon by an external force, holds true not only in physics but also in markets.
The equity market, unlike the rupee, is falling on its own weight with not much selling witnessed by foreign investors in the current month. There have been only three net selling days by FIIs in the current month so far. FIIs are net buyers in the current month, yet markets continue to fall like Newton's apples.
What the market needs to arrest the fall is an 'external force', which can be either in the form of strong buying or positive news flows to pacify the markets. In the current scenario both are unlikely. Recent roadshows by broking firms highlight the lack of faith and interest in Indian markets. Government on its part is bent on taking the economy down the drain with its vote based policies. There is little that can be expected over the next months in terms of policies or flows.
Yet there are some brave hearts who are willing to invest over a long-term period. Some of these like 'long only' investors (largely pension and insurance funds) use the fall as an opportunity to pick up decent quantity of shares, which would be hard to acquire when markets are good. It is their nibbling in the markets that can provide one with a trading opportunity. How the pace of selling has to come down and the dust needs to settle before even taking a small term punt.
Following are five tell-tale signs that suggest a temporary change of sentiment
1. Rupee stabilizes: One of the biggest fear both for the industry and the market is a falling and volatile rupee. A stable currency is the prime requisite for investment, both in business and markets as it allows some clarity before committing oneself. The rupee needs to stabilize before the equity market does.
2. Bond yields to decline: Recent measures taken by the RBI has pushed up the bond yield on the 10-year benchmark paper to nearly 9.4 per cent. When a relatively safer instrument offers such high returns, there is no way that smart money would be attracted to equity markets.
3. Higher FII purchases: Current FII net purchases are at a run-rate of around Rs 200 crore every day. A pick up in these to around Rs 400-500 crore would indicate higher interests in the market. During better times FII purchases are over Rs 1,250 crore per day.
4. Higher delivery volume: Market-wide delivery based volume are at multi-year lows. This is one of the reasons why the price fall is bigger despite low volume. Low delivery volume indicate no genuine interest in taking shares home. Delivery volume need to pick up to disclose buying interest in the market.
5. Indications of elections: The present government and its policies have been written of by the markets. Investment Guru Jim Rogers called government measures as hopeless while stating he was not optimistic on India. Any signs of an early election will bring in a hope-based pre-election relief rally.
