MARKET CORRECTION – INEVITABLE?

“Is there a market correction on the horizon?”

“Are we heading towards a crash?”

These and many more such questions are the only thing which anyone related to the market is asking today. No talks about any specific stock or even a “tip”. All want to know only one thing – are the markets going to correct soon?

The reason why everyone a correction? First and foremost – good times do not last too long and thus the fear has come in that the party on Dalal Street has been going on too long and it will be shut down time soon, the police (Fed, RBI, Govt) will come and play party-pooper.

Yes, that’s the predominant reason and then there are other reasons too. Like the fact that there is a lot of liquidity in the hands of people – many have more disposable income and little places to invest in thus why Indian stocks have had nowhere to go but up. But will this liquidity last forever?

Its just a matter of when, and not if, that the stock market corrects. The Fed is scheduled to meet on 22nd night and till then the markets will remain volatile with a negative bias. The worry is about tapering. But then the Fed will not rock the boat; when the tapering starts, it will be gradual. More worrisome is actually the interest rate lift-off. A rate hike is what will start sucking away the liquidity, meaning a correction in the money pouring into the markets like now. Then again, a rate hike is not going to happen so soon – with economic growth sputtering, a rate hike will be a death knell.

Yet, didn’t the market know all this, all along. None of this narrative is new; most traders and investors knew this but simply didn’t care. If they were able to tune out the alarm bells then, why not able to do so now?

Its more psychological as everyone knows that what goes up comes down. Also, various media reports are putting put reports, fear mongering that the markets are ripe for a crash and this is one thing they are not able to tune out this time. The markets have gone up beyond all expectations and that’s probably why, because it is perceived as unreal, that the punters feel that a correction is round the corner.

Maybe there is correction – it should  come because nothing one-way – up or down, is good. Intermittent corrections are all signs of a healthy and deeper market. Even if the Fed announces a tapering, the tantrum will be brief.

As perfectly reiterated by our Editor, Mr.SP Tulsian, “ Bear phase never comes in all sectors and all stocks. The view of a sharp correction or weakness in the market is made by people with vested interests. The same media wrote off the Indian economy last year in March, when the Nifty fell below 8k.”

The golden rule, if you believe in the strength of the Indian economy – every dip is a buying opportunity. The Fed and the RBI and Govt, with their policy actions tuned to the market will not allow it to crash. Simple logic – wealth effect is as important as the monetary policy; people will spend more only if they earn more. In our modern times, central banks cannot tolerate market downturns.

If the market corrects, the very same Fed or the RBI or the Govt will step in and help the markets all over again. Every downturn is a buying opportunity, its neither a crash nor a bear.