WHY ARE THE MARKETS HITTING NEW HIGHS EVEYRDAY?

By Ruma Dubey

“The market has gone up so high that we will now need oxygen!”

Somehow, that is how one cannot help but feel when we see the markets hitting new highs every single day – it leaves one gasping for breath! Compared to a bear market, this bullish run is a good problem to have but nevertheless, it is a problem.

For the cautious, this daily relentless surge causes anxiety as one is not able to really put a finger on the real reason for this euphoria. Every day, an over 200 points jump is good but too much of everything, even the good, can be harmful. This is not a pessimistic view but a cautious look at the reason for the markets happiness.

The reason why the markets are up today is the low inflation – retail inflation cooled off to a historic low of 1.54%; for the past three months, CPI has been low consistently. This in turn, the market has interpreted as a strong signal to the RBI for a rate cut in August. Really? The credit policy is due on 2^nd August and based on this low CPI, the market or rather marketmen have concluded that RBI will bring down interest rates. As stated in our Cover Feature of yesterday, this seems unlikely as RBI might want to wait and watch the impact of GST and to assure itself that this low rate is sustainable. And even if there is a 0.25% rate cut, how far will it go to really perk up demand?  Banks have reduced rates but not many are biting. But logic and market nowadays do not seem to go hand-in-hand. The market goes up and we try to figure out the logic – that’s the way it is now.

The stock market is stated to be the barometer of the economy. But that theory also seems to have been debunked. Yesterday, along with the CPI, the IIP for May at 1.7% clearly showed that the economy was slowing down. There is a desperate need for new investment, especially from the private sector to come in. Consumption is down and this is what we see in CPI and IIP. But the markets have decided to completely ignore the IIP and concentrate only on the CPI – how is that logical?

FIIs, unlike the last time around are not fueling the bull run. In fact in the month of July, they have been net sellers – out of the 6 days of trading till 11^th July, FIIs were net sellers on three days and net buyers on three. FIIs are net sellers to the tune of Rs.2000 crore while in the month of June, they were net buyers at Rs.54,000 crore. What this indicates is that FIIs are booking profits as they invest – the current precipitous high perch of the market means most are sitting on a rich mountain of profits and booking gains makes perfect sense.

Retail investors trust has been eroded and dented. They have literally disappeared and will not come back in a hurry. What we are seeing today is growth in selective stocks only – a non inclusive growth creating major inequalities. The current upward rally can be due to expected improvement in growth but somehow, yeh baat hajam nahi hue; it seems more manipulated than a surge in led by improvement in key economic indicators.

The bottomline –some days wildly up and the other day, sharply down. Don’t dance to the tunes of the FIIs and Sensex. Better to stock up on quality stocks like always, with only the long term perspective in mind. Mind you – even if a long term investor, take stock of your inventory. If you are sitting on a pretty gain, book partial profits and use the money to pay off your car loan or do your house repair or pay for your child’s tuition fees. And if you have loss making stocks, sell them now so that you can use the loss to offset your gains.

Thus even if long term investor, don’t ignore the market; celebrate the bull run but with a lot of cautiousness.