Huge grey market premia set stage for market rally

Written by Markets Bureau | Mumbai | Updated: May 18 2009, 06:44am hrs
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The unofficial grey market soared to an 8% premium over the Nifty on Sunday, validating the estimate of investment houses and brokerages that the stock markets will move up on Monday morning. The markets are also expected to react positively to the Congress Working Committee resolution endorsing faster and more inclusive growth.

Investment houses and major brokerages scrutinising huge banks of data over the weekend are, however, convinced that despite the initial rally, the stock market will drift down for some time. The Indian stock markets have always reacted strongly to the outcome of the general elections.

The technical explanation the brokers offer for likely market movement is based on the gap-up measure. Anticipating a somewhat stable coalition after the poll results, the traders had bought heavily in shares over the last week, expecting to sell them at a higher price creating what is known as long position. In tune with that, the Nifty has gone up to 3,671.65, way above the current accepted support level of 3,500. This gap means the traders are sitting on potential profits on their holdings, which they will encash at the first opportunity when the market rises, explained Arup Mishra of Elara Capital.

The concentrated pressure of sales could bring down the indices. Also, an initial rally would mean new investors will be wary of investing now, preferring to wait till it drifts down somewhat.

The line of thought was endorsed by Parag Parikh, chairman of PPFAS, a boutique stock broker. There will be forces that will drive the market ahead. It is obvious that a strong mandate for the Congress will drive up sentiments up. After that surge, there would be corrections and investors should be aware of this.

A report from Religare Enterprises issued over the weekend also said the big event for the stock markets would be the allocation of ministries, expected this week. But the real big event would be the Budget in three months.

If the Prime Minister embarks on real economic reformpart II, market could move to 14,000 in our view in three months, unless some unknown negative development happens in the US markets.

In anticipation, several brokers have issued warning notes to their members to tread cautiously on the market on Monday.

Now expectations are high. Market will be euphoric and may open about 10% higher. Therefore, one has to be cautious, but this may possibly be a beginning of another bull market. Once euphoria is over, one has to be cautious about negative cues from global markets, over-supply of papers and swelling fiscal deficits, says Nirmal Jain, chairman, India Infoline.