Nifty at 6950, Sensex 22,880 by July 2008

By Vasant Joshi
Technical analyst
Religare Securities

The Indian benchmark indices, barring minor hiccups, have remained strongly bullish last 18 months since June 2006. The origin of this bull phase goes way back to September 2001 when the BSE Sensex was at 2595 and NSE Nifty at a low of 850, says Vasant Joshi, technical analyst at Religare Securities. The Sensex has seen an eight-fold and Nifty over seven-fold rise since then, he adds. The volatility, of late, has crossed all the normal established barriers seen so far. The sheer pace of appreciation in the market valuation of small cap and mid cap segments has attracted a new breed of investors. There is, however, nothing unusual in it. The hyper volatile markets of 1992 and 2000 have also seen this phenomenon. We have seen a massive crackdown in indices in the post 1992 and 2000 scenarios, Joshi said. There is a clear-cut demarcation in the earlier bull phases of 1992 and 2000 and the current bull phase. The earlier bull phases were more or less driven by a handful of market operators who eventually got crushed under their huge outstanding positions. Professional players like mutual fund managers, domestic institutional investors, foreign institutional investors and hedge funds now contribute a major chunk to the market turnover. Also, an investor is now well equipped to hedge his investments without offloading them with the help of a variety of instruments available in the derivatives segment, says he. The continued rise in money supply has also resulted in rapid price appreciation in small cap and mid cap stocks. The valuation of quite a few stocks is, no doubt, mind boggling and difficult to digest on the basis popular concepts of stock valuation. The age-old concepts of stock valuation have become more or less redundant in view of the structural changes in the market mechanism. As long as the flow of funds remains intact and the settlement in derivative segment continues to be “cash settled”, there is no threat whatsoever to the ongoing bull phase. The bull phase can, therefore, be expected to continue through 2008 with occasional routine reactions needed for the realignment of market forces, Joshi says. A strong performance by the corporate sector is just supplementary to the changes in trading mechanism over the last 3-4 years. An average growth of even 10 per cent a year would be sufficient to keep the stock prices rocking and help them climb new peaks, says Joshi. “The projections for 2008 are in relation to the base of June 2006. The recommendations are based on the assumption that there will not be any major changes to the present trading mechanism. It should be noted here that a fall of more than 3 per cent below the suggested stop-loss levels would negate the upper projections for that sector. In view of the historical data, I have made use of BSE sectoral indices for the purpose.”