Stunning rally in the Indian stock markets

The results of the recently concluded elections to the Indian parliament produced a stunning impact on its stock markets. The sensex recorded a 17.3 % rise on the first trading day after the results, the highest single day rise ever by any index in the world. The month of May recorded the highest monthly gain of 2893 pts in 17 years. On the day of writing this post the sensex closed above 15000 for the first time since Septrmber 08 after touching a low of 8047 in Mar 09. This is nothing short of a spectacle. Market participants were plainly astonished as the indices soared. No one expected such a dramatic improvement in the market sentiments . Clearly Indian markets have been re rated on the back of a clear mandate given by the voters. The congress party with its allies have been able to form a government without the support of parties with divergent views on economic reforms notably the left parties, read my recent post here. The present Govt is therefore expected to go ahead and carry on with the reforms it always wanted to but could not. Markets are giving this the thumbs up.

The question now on everyone’s mind is how far can this rally go. Clearly momentum of the market is very strong and gives the illusion of being unstoppable. But that cant be, it has to stop somewhere. For the time being it is better to go with the rally till the general budget which is slated to be presented on 3rd July . There are strong indications that this time around Govt is clear headed in its intentions. Expectations are that a good measure of reforms will be initiated. Even if the actual measures taken may not be as per expectations of the market, at least there will be roadmaps of actions to be taken in in its 5 year term. And that would keep the markets happy. Then around that time results for the 2nd quarter should start coming in. Indications are that rural demand is strong as evident from the sales numbers of cars, 2 wheelers, mobile connections etc. The direction of the budget and the performance of Indian companies should make it possible for us to take a call on the markets.

While it is too premature to say we have decoupled from the developed markets the true situation could be that our very own consumption story is likely to get a stimulus with the new Govt in place. This will ensure a respectable growth number . It is already close to 7 and any increment will be viewed very positively. This by itself will ensure inflow of further capital into the economy which will drive valuations up. This will be only up to a point and beyond that it will be the global factors again. In any case the small decoupling that will occur will mean that we will not fall as much as the developed markets. Presently of course the global markets are assisting us.

In my previous post I had mentioned of resistance at around 14700 on the sensex. The sensex refused to go beyond 15000 and has been consolidating between 13500-15000 ever since it broke out from the 12200 levels. As of now 12200 should be taken as the stop loss level in case the market takes a turn which is unlikely at the moment. In case it breaks out of the 13500-15000 range which is very likely given the current momentum, the next targets will be very aggressive indeed. Valuations however might go ahead of fundamentals in the near term. For those wanting to put in fresh money it is better to wait for a correction. Those who are already invested just ride the rally with strict stoplosses. Taking a trailing stoploss view this would be every 1000 points beyond 15000.

Till my next then,

Happy investing