Stocks have rallied and now what

I occasionally write comments on blogs that I read. A comment on "Time to buy" posted by Sudershan Sukhani on his blogsite read here goes like this :

"Exactly, now seems to be the time to start accumulating for the medium to long term. Prices of stocks of good companies i.e. companies with proven management and ability to sustain growth have fallen to abysmally low levels. Prices of such company’s stocks appear to be competing with scam hit Satyam’s price in as much as the race to the bottom is concerned. While it is true that the stratospheric valuations of most stocks reached at the height of the last bull market had to be corrected , and true to its form the market made excesses here also, the extent of the present decline is not in sync with valuations. These are precisely the indicators which one should not miss or else one would loose the opportunity. Also, it now appears India is comparatively better placed and therefore there will be lesser risk aversion and money is expected to start flowing into the market sooner than later. We will however have to wait till the elections are over".

This was posted on 11 Mar 2009. The sensex had closed at 8160 the previous trading session, started moving up from the next session after making an island reversal.As on date the sensex has gained by 50% and individual stocks by as much as 100%. While there were enough indications of an imminent trend reversal , the extent and ferocity of the reversal has taken everyone by surprise. World markets have also shown similar rallies. Happily for us, FIIs since mid Mar have pumped in (net purchases) over $2 billion.

The question on everyone's mind is where to go from here. Has a new bull market started or are markets ripe for a correction. Making predictions on stock markets is a mug's game. It will be prudent however to start getting cautious at this stage. For one , bear markets don’t go in a hurry and as a corollary bull markets too don’t start in a hurry . One should expect the markets to test the bottom it has formed earlier before a new high can be seen. Economic data on the global front is far from being rosy. The damge has been colossal and it will take some more time for recovery to set in. India though can be better placed in view of its domestic demand but unlikely to have an impact the markets if global sentiments don’t support.

So far as the markets are concerned, technical indicators point to an overstretched condition for the short to medium term. Long term charts however indicate continuation of the rally for some more time and that too with vigour. The inference is that markets may take a pause and then continue with the uptrend for some more time. For how long is difficult to say. We have an event ahead of us. Any nasty surprise on this front and we will be hurtling down as fast as we had climbed up. Any surge in the indices in the ensuing period leading to the election results should be utilized to book profits. Immediate resistance of sensex is around 12500 levels. In case it is able to cross this resistance the next resistance is around 14000-14700. For those who are holding cash and have not been able to buy earlier, no harm in waiting for a while more till the election verdicts are out when the situation can be reviewed.

Till my next then

Happy investing