Concern at narrow rally

Updated: Mar 29 2006, 05:30am hrs
Since October 2005, we have seen movements, largely on the index scrips. The cash shares have not really done well. In September, when the index was perilously close to 7,500, there was a lot of worry in the market. Because, had it touched 7,500, it would have signified a change in trend and the markets could have dropped a lot.

But, the Sensex rallied in the past six months and has now crossed the 11,000 mark, too. What is worrisome and is a cause for concern is that the interest is concentrated on a few stocks. The rally is not broadbased. For instance, look at the steel industry. There has been a sudden rise in large-cap steel stocks in the past two-three weeks. Smaller steel counters are not showing much movement.

Lots of investors who had entered the mid-caps seven-eight months before are not seeing any major appreciation. Cash shares have, in fact, fallen by as much as 50-60%. So, investors are stuck, despite the Sensex scaling new peaks every week.

In the past six months, the Sensex has risen by over 3,400 points, or close to 45%. What has done the market a lot of good is the way the finance minister has assuaged worries whenever there has been a sharp fall. For instance, when the Sensex fell over 200 points over two sessions in the second week of March, the minister immediately stated it was a correction and there was nothing to worry. Foreign institutional investors (FIIs) had sold close to Rs 4,700 crore in the derivatives segment in those two days.

The Indian markets have seen two big tests in recent times. One relates to the drastic fall in the index when the United Progressive Alliance (UPA) government came to power in May 2004. The second test came when the markets fell in October, with the Sensex at 7,600. The markets withstood both the tests.

The current price in-creases look sustainable. Obviously, one is not going to see any major correction in March. This is apparent from the fund flows, both domestic financial institutions like mutual funds and foreign institutional funds. If FIIs get more funds on a net basis, prices will certainly rise. Every new foreign institutional investor entering the Indian market will contribute to a rise in the index.

But, yes, people are now more defensive with their portfolios. They are far more alert. One has to get back to stop-loss (orders) in such a market. And retail investors are not really participating in the equity markets any more. The FIIs, too, are looking at relatively large cap stocks. They see a lot of promise in capital goods, infrastructure, etc, which are long-term bets.

The writer is former president, Delhi Stock Exchange