The old adage “the only thing constant is change“ applies to most things except the stock markets . Even as each day the headlines scream that there is  new trend the fact remains that markets are stuck in a range which refuses to change.  Should that not then make life easy for a short term trader? Buy at the lower end of the range and sell at the upper endEasier said than done, thanks to one word -Volatility”. It makes both the prices and the mind fickle. Loss on trades then become inevitable. Its not without reason that they say “trend is a trader’s best friend”.

So why are the markets volatile and yet rangebound? Extreme and compelling arguments from both the buyer and seller are the prime reasons. The seller who is convinced that the sentiment is weak globally and therefore in India, supports his reasoning with logical economic points like increasing interest rates, high inflation, falling growth and negative external trade. Weak and tainted governance certainly does not help. Nor does the tragic Mumbai blasts which cause an immediate uncertainty. The buyer on the other hand uses these very points as his arsenal. He argues, falling growth means an end to hiking interest rates, falling oil prices will reduce the import burden as would a strengthening rupee. Then, unearthing scams reflects strong governance bent towards reforms. Not to forget, markets have overdone themselves by erasing  15% from their peak.

No matter who is right, the last word seems to lie with the Foreign Institutional Investors (FIIs). They are singularly responsible for the recent revival of the markets. So why are they buying when the world economy looks gloomy? Precisely because it looks gloomy. Gloom means you look for markets with the highest possibility of an early boom. India is right up there when it comes to options. Also, having taken a beating at home, they look to safer markets abroad. India with its conservative approach during the financial crises provides a solution there as well.  This of course is the formal opinion.  Informally, one would tell you what’ s happening is simple round tripping. Indian unaccounted money (the figures from the 2G scam will tell you there’s lots of it) gets routed back into the country through formal channels under the guise of the FII. Illegal as it is, the government does not mind it. It helps the return of black money to the country (no thanks to Baba Ramdev ). Besides, weak markets means a worsening image of the UPA and buying by so called FIIs is a sign of confidence. This could serve as an antibiotic to the centre ailing with the taint of scams. It would also help the government extract a better price from its upcoming disinvestment plans. 

There is a third argument- Opportunity.  International hedge funds are always on the lookout for it and seemed to have found it when the Nifty fell to 5200 last month. Aggressive buying added to the numbers as it did to the confusion of the investor on the street who was getting convinced that the markets were entering a bear phase. Now he is scared that the hedge investors looking for a quick buck may exit just as quickly as they entered.

So all in all, it’s a scary-go-round.  The stock market is stuck in a range as it goes around in circles. Its scary.  A volatile market within a range cuts you both ways. Also the longer it stays this way, the stronger will be the break out from the range. Once that happens, there would be many caught on the wrong foot. The critical question remains “which way will it break out?”. That’s a tough one as the answer may not lie within India .Till then,  its best  to stay away from the circle of strife. 

Leave a Comment

Your email address will not be published.