With Foreign Institutional Investors (FIIs) having mopped up shares worth $3.7 billion since the start of the year, it’s no surprise that cash market volumes are showing a smart rally. The average daily turnover of the cash segment, which was R10,777 crore in January, has seen a sharp jump to R15,656 crore in the first five trading sessions of February.
History suggests that a spurt in cash segment volumes in times of a turnaround post bear markets, needs to sustain for at least three months before one can call the end of the bear market. ?The average turnover in January, even after growing 20% over December cash volumes, has been in line-with the average turnover value between May and November 2011,? said Vijay Kanchan, head of institutional derivatives, J M Financial.
In an analysis, FE traced the cash segment activity before and after the last three bear markets, including the latest market plunge that started in November 2010. This included a more than 50% of market crash observed in the bear markets following the tech-bubble of 2000 and US subprime-market led crash in 2008.
During the previous two bear market phases, the cash market volumes demonstrated a significant rebound after 15 to 17 months of a lull, namely in August 2001 and March 2009, respectively. However, unlike in 2001, the average daily turnover in the cash segment post March 2009 remained robust in the following four months before settling into a higher base. This resulted into a strong U-turn in market sentiment and the next 20-month long bull run in which markets more than doubled.
The current rebound in cash segment movement appears similar to that in March 2009. Both the number of months after which a rebound appeared (14 vs 15) and also the extent by which volumes have recovered (20% against 28%) were similar. According to Kanchan, even as volumes have further improved in the five trading sessions of February, it may be too early to call a turnaround in the market sentiment.
While many fund managers are citing the lower interest rate expectations and recovery in rupee as the main drivers of the recovery, there are persistent concern that this rally is driven by lose money policies and is not substantiated by fundamentals. Andrew Holland, CEO, Ambit Investment Advisory, ?The equity markets across the emerging economies are rallying as a result liquidity easing across the globe. Little has changed fundamentally.?
Interestingly, with an average gain of 2.8% in five weeks since January, the benchmark indices have not only succeeded to overtake strong resistance zone aligned with the bearish market trend that started in November 2010 but also managed to close above their 200 DMA.