Market Notes.

The Nifty fell to 5034, down 100 points from Friday. The decline was cased by weak American markets on Friday which fell by 3%. Compared to that 3% decline, our market fell by about 2%, so we are that much better off.

With all the volatility, the up and then the down gaps we are seeing, the Nifty remains in a trading range between 4900 to 5100. A big move in the Nify may be expected once the Index moves out of this range.

A rising wedge in the Nifty was broken on the downside today. The wedge gives a target of about 4500 for the Index. Remember, markets will not go in one direction ll the time. Even if the Nifty is going down, we are likely to see a number of choppy days, up days and of course, down days. SO, if your view is for Nifty 4500, then you have to accept the reverses and volatility that comes with it.

Take Care, the Indian markets may be overvalued…

In March 2009, the S&P500, the benchmark, U.S. index was at 666, its low in the bear market. On Friday, June 5,2010, the Index closed at 1064.88. The Index has gained about 60% from its lows. If we take the same 60% gain for the Indian Markets, the March 2009 low was 2539 for the Nifty. Add 60% gains, and, we should be standing at 4062. Therefore, compared to the U.S. markets we may be overvalued by a 1000 points!

No, this time it is NOT different

Similar divergences were appearing between the Indian Markets which continued their rally and the international markets, which had already started falling in Nov-Dec 2007. Then, a number of so-called experts (mainly fund managers or people who use funds from OPM – other people’s money) used to come on TV and tell us – this time it is different, India will go its own way. But that did not happen, and, when we fell, we fell with a big thud!

It is NOT the Economy
There is a clear relationship between the long term trend of the stock market, and, the economy. If the economy is growing, we should see a long term uptrend in stock prices. But, suppose stock prices have reached high valuations? Then, even with economic growth, there will be long periods of adjustment when share prices may fall or remain sideways. But the economy will still be growing, isn’t it? Now, why should high valuations be a problem if he economy is growing? First, the world may be moving towards risk aversion – meaning investors are not prepared to pay high premiums for equity, and, second, short term bubbles may put share prices out of line with ‘normal’.