Mohit Gupta | MarketDhara@Gmail.Com
“Buy the rumour, Sell the news” is one of the most popular terms in the stockmarket. The modus operandi of many stockmarket players (or “operators” as they are better known) is to ramp up stock prices ahead of certain key announcements regarding individual stocks or the broad market and then exiting once the event actually materialises. The results season, monetary policy announcements and the Union Budget are three examples of such occasions.
The latest trigger for such a ramp-up globally was the announcement by the US Federal Reserve in August 2010 that a second round of quantitative easing (Dubbed as “QEII” by the financial media) would be undertaken from November 2010. Several stockmarket indices have rallied by 15-20% (with commodities and bonds tagging along) since the first week of August riding on hopes that a large additional dollop of liquidity would be infused into markets.
Market estimates for the same ranged from 500 billion USD to a trillion USD. The actual figure amounted to 600 billion USD spread over a few months, closer to the lower end of the estimates. Surprisingly, this has not led to a sell-off. In fact, markets rallied strongly after the announcement. So has the above mentioned term been turned on its head?
I think that the longer this continues, the more the “Greater Fool” Theory is at work. Speculators (I would not call them investors) are having a field day, purchasing assets of all hues globally irrespective of their underlying fundamentals, with the aim of “flipping” them as soon as possible. Vehicles such as “Exchange Traded Funds (ETFs)” are preferred choices as they offer easy entry and exit. Usually correlation between various assets moves towards “Unity” in times of crisis. However, this time around it is happening during more delirious times. To top that, the use of leverage will only magnify going ahead.
The Fed’s determination (or is it compulsion?) to further lower the cost of lending has resulted in the dollar replacing the Yen as the “carry-trade” currency of choice. It is ironical that the Fed’s actions appear to be helping emerging economies and markets more than the US market. Many of these emerging countries are dreading the prospect of rising asset prices leading either to “imported” inflation or an unwarranted strengthening of their currency vis-a-vis the USD. As we conquer one lofty height after another, fuelled by “hot” money, the dangers of a collapse caused due to “carry-trade” unwinding increase exponentially. The memories of the yen related unwinding in 2008 still haunt many traders.
Indian investors should be wary right now. It is no doubt tempting to go with the flow. However, mindless trend following can be injurious to financial health. It is true that retail investors have missed out on a large part of this rally. However, that should not mean plunging in at these levels. If at all you want to participate, choose stocks that are not the beneficiaries of outsized FII inflows. These include some good mid-cap and small-cap stocks. Do not invest on the basis of tips or hearsay.
The name “QEII” is synonymous with that of a famous cruise liner. Take care to ensure that your actions do not follow the course of another famous liner….."The Titanic”.
No comments:
Post a Comment