New year holds lot of promise

MUMBAI, DEC. 30. A stormy year for the equity markets is over. While the outlook for the year 2002 is still unclear, the year gone by (2001) will be best remembered in the history of Indian capital markets as the one which saw the Indian markets moving closer to the global standard in terms of adopting the international best practices for trading and settlement.

The calendar year 2001 started with wishful thinking that the weakness witnessed in the market would get over. The problem started in February 2000 when the Sensex touched a high of 6151. It opened at 3990.65 in 2001 and hit a high of 4462.11 on February 16. The weakness continued thereafter on the fear of U.S. recession. As the U.S. recession spread out to other countries the global equity markets declined further. Accordingly the Sensex also continued to move down.

The year 2001 passed by with full of events and majority of these events were negative for the overall sentiment of the market. The series of events began with Gujarat earthquake and ended with a terrorist attack on Indian Parliament. The events in between included pay-order scam, arrest of big bull operator, Defence scam exposed by Tehelka, UTI stopping redemption and repurchase of its premier scheme US-64, Morgan Stanley Index getting restructured and couple of other negative events.

Further, it was hit by terrorist attack on World Trade Center in the U.S. which led to panic in all the global markets. During that time Sensex touched a yearly low of 2594.87. From there onwards the markets reversed, through utter pessimism, to 3500 on December 6. From that level the Sensex once again slid to 3100 at the end of this calendar year.

The entire rally from 2600 to 3500 in the Sensex has none of the characteristics attached to the first leg of a bull rally. ``It is clear now that the market is in a corrective intermediate downtrend," said Mr. Jamshed Desai, Research Head of TAIB Securities, a leading FII. Tension on the border has effectively put the brakes on any efforts by the market to rally.

``The market is rattled and shaken and cumulative bad news of the recent past is surfacing as quick reasons to explain the correction," said Mr. Desai adding, ``we should expect the correction to test the psychological 3000 level soon in the coming weeks." ``The 3500 mark is clearly the defining limit for flagging off the next rally," he added.

``On monthly chart the Sensex penetrated the support level of 2700-2800. It also means that the Sensex may not remain in the bull orbit and there was possibility of further weakness or maybe sideways movement. On a daily chart, the Sensex has rallied in channel from 2600 to 3500 which means the rally is corrective one and not an impulsive one. The structure of this rally also looks like ``A/B/C" pattern," said Mr. Jignesh Shah, Strategist, ASK-Raymond James Securities. According to him this corrective rally may go up to 3700 or so, but it depends on the level of 3050 to 3100. If the 3050 to 3100 level is maintained as support, then this rally has a possibility of going up to 3700 or above. But at the same time, if the Sensex moved below 3050 then it may get worse.

``It looks like a momentum driven rally and it is difficult to know the exact target of the rally. Also composition-wise, it looks like TMT and pharmaceutical stocks will stand a better chance. Cement and automobile may gain from time to time. Any weakness in volume will indicate that the rally is coming to an end. However, macro-economic factors are still not supporting a rally and for a sustainable rally the fundamentals need to support it," Mr. Shah felt. The year 2001 also saw the Indian derivatives market gain prominence with the introduction of options on the index and individual stocks and single stock futures.

The early part of the year saw the account period settlement (account period settlement essentially gave the investor a period of one week within which the speculator could square off the trade without having to take delivery) being phased out and replaced by compulsory rolling settlement. In the heydays of the technology bull run account period settlement resulted in 90 per cent of all volumes in the Indian markets being non-delivery based trades. The flaws in the account period settlement were brought to light during the payment crisis that rocked the markets in the early part of 2001.

The year 2002 promises to be an exciting one for the Indian capital markets. The start of the year will see all the stocks moving to a T+5 rolling settlement. A few months down the line T+3 rolling settlement will come into force. ``We believe that the move will be beneficial for serious investors like institutions, as a faster settlement implies a speedier turnover of investible funds," said Mr. Vineet Bhatnagar, Managing Director, Refco-Sify Securities. ``We look forward to year 2002 as the one in which the Indian derivatives market will come of age," he added. Rolling settlement has already led to the speculators shifting their sights to the derivatives market leading to an increase in the volume of futures and options traded.

One of the important milestones that is expected to be cleared in 2002 would be the introduction of delivery-based stock options and futures, Mr. Bhatnagar felt. This would lead to a close integration of the cash and the derivatives markets. The bottomline is that in the year 2002 the derivatives market will be too big to be ignored by any serious market participant and in the medium term the derivatives market volumes would be a multiple of the cash market.

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