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Time For Correction

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It was a perfect pitch for the Indian equity market to set its comeback. First there was the oversold position by marketmen in the domestic market. Second, the flow of positive news like food inflation in India falling from double digit to 8 per cent, optimism that European officials are taking action to alleviate the debt crisis and provide cheaper dollar funding to European banks, expectation that the Reserve Bank of India may cut rates in its forthcoming monetary policy on 16 December 2011 and developmental reforms initiated by the Indian government proposing 51 per cent foreign direct investment (FDI) in multi-brand retail helped the Indian equity market end the week with a gain of over 7 per cent.
 
Though the market made a strong comeback, it doesn't seem that it would be able to sustain at upper levels as the undercurrent still remains weak and the uncertainty over a range of issues in the domestic as well as global markets is likely to keep the market fragile. The outcome of the EU Summit could prove crucial. On 9 December, German and French leaders will present plans to better integrate Euro-zone. This week, the market will also keep an eye on the US job claims data and domestically on the inflation numbers. The market may also witness a jolt if the government is unable to push its reform process, particularly the FDI in multi-brand retail. It's a test for the Congress-led UPA government which is facing a lot of opposition from even its ally members.
 
Despite most of the negatives being discounted in the price, experts don't think the rally could sustain. Says Gurunath Mudlapur, managing director at Atherstone Capital Markets, "Indian equity markets are in a bearish sentiment in a by and large bullish market. There are India specific macro-issues like rising interest rates, drying up of fresh large FDI and FII investments, high inflation and rising current account deficits. Once these macro India specific issues are adjusted, equity markets can see an upmove, until then it will be a volatile Indian market."
 
Meanwhile, the Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) after falling for four consecutive week rallied last week to close at 16,846.83, recording a weekly gain of 7.33 per cent, its highest weekly gain since 17 July 2009. This is the third time since September 2011 the Sensex has bounced back after touching a new low below the 16,000 mark. This time the Sensex bounced back after touching a low of 15,478.69 on 23 November 2011. The Sensex has been hovering between 15,800 and 17,900 levels. Initially it fell from a high of 17,211.80 on 9 September 2011, to touch a low of 15,745.43 on 4 October 2011; thereafter a buying spree at lower levels witnessed a vertical surge in the Sensex to touch a high of 17,908.13 on 28 October 2011. Every time Sensex touches a new lows, it also manages to recover quickly and attain new highs on tthe rebound. It has been the FII flows that did the trick and pushed the Sensex above 16,000 last week. For the week, FIIs were net buyers in the tune of Rs 695 crore.
 
For quite sometime now the Sensex is doing a see-saw following the uncertainty over the Euro-zone crisis and lack of trigger in the domestic market. It's not a runaway market as uncertainties surrounding the market aren't going away anywhere soon. Though liquidity easing in the Euro-zone and US may see some money coming to emerging market like India in the coming months, it will only be the developmental reform that will help our markets move upwards and that today seems to be in a limbo.
 
In such a scenario investors will be better-off to stay on sidelines, as market could correct after last week's sharp recovery. Bear markets are the best time to build a portfolio and for investors this is the opportune time to pick ones desired blue-chip stocks that they may have missed in the previous bull-run.


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