When Good News is Bad News - Sainik

The global scenario is getting murkier by the day. The economic data coming out regularly, especially out of the US, is dismal to say the least, yet the US markets are bucking the trend by having sharp intraday reversals to the upside.

Yesterday's movement in the US markets was a case in point. The June employment data was worse than expected and the markets promptly tanked in the first hour, with the Dow down by nearly 160 points at one time. But the slide was reversed by late intraday gains and finally the Dow managed to close only 20 points lower.

Are markets being resilient to bad news? Or is it something else?

Astute market observers have been detailing these sharp intraday swings on machine-based trading. It is believed that more than 70 percent of trading on US exchanges is taking place through complex algorithms (computer programs) and models designed by "nerds" where the computers trade against each other. Here price, velocity and volatilty etc. are the variables. News and fundamentals are not captured in this scenario.

Alogrithmic trading was said to be the principal reason for the "Flash Crash" which occurred May 6, this year, when the Dow lost nearly 1000 points intraday. It is surmised that we will have many more flash-crash kind of days in the future, except that we could see flash-rallies too,when, for no explicable reason, the Dow could spurt 1000 points intraday.

So, be prepared.

On another front, the currency markets are presenting a very interesting picture. The US dollar has become a dog, with everyone shunning it versus all other currencies. Just last month the Euro fetched $1.18, now it buys 1.33 dollars. At the start of the European crisis, everyone expected the Euro to achieve parity with the dollar. How a few weeks can change the perceptions of analysts?

I was watching TV where analyst after analyst was saying they were disappointed with the quarterly earnings of companies in India. I was wondering whether it was the companies which disappointed or the analysts who got it all wrong.

Some brokerage houses have reduced their Sensex earnings for this year to around 1015-1025 from earlier 1060-1080. This translates in to more than 20 percent year-on-year (YOY) growth. However, going by the first quarter results, even this number looks unattainable, since the base effect will begin to kick in for the next three quarters and inflation remains at stubbornly high levels.

So to labor the point, the Indian markets are fully valued at these levels of 18,000 going by historical standards. The next rally, if and when it comes, will place us squarely in bubble territory. It is not improbable if we are already in bubble territory considering the relentless buying by FIIs as witnessed through the week.

Now it begs the question as to who are these guys were, buying so aggressively at these levels? It was intriguing to hear the viewpoints of a couple of well-respected market commentators as well as FIIs who were themselves surprised, since the old India hands (FIIs who have been here for a long time) were not getting any inflows.

We are unlikely to know the "mystery" buyer. Be that it may, we can look forward to a very interesting week.

The Fed meeting is on August 10 and global markets, including ours, are likely to react to the Fed's meeting. After a very long time, this meeting of the Fed assumes significance to asset markets as some market-moving announcements are likely to be made. The next big one is likely to come on August 17 from the US government, regarding its strategy on the Housing issue.

On the Indian corporate front, we have yet to hear of results from the Tata biggies, Tata Motors and Tata Steel. The markets range on the Nifty is still 5350-5550. As oulined last week, it may be prudent to book profits in the investment portfolio as the Nifty is trading above 5425 levels. Short-term traders could be going long on all declines keeping 5350 as the stoploss.

Among the heavyweights ITC, Gujarat Ambuja and TCS look interesting.

The capital goods sector: LT and BHEL look weak.

Bharti, ICICI Bank, Infosys and Tata Motors look ripe for a significant correction. IFCI lost heavily on Friday. It would look attractive below Rs 55.

Buying on declines looks attractive in Punj Lloyd, SBI, Reliance Industries, City Union Bank, Dhanalakshmi Bank and IOB.

Whatever you do, have a successful week ahead.