If strong risk appetite and subsequent market rally of the last few weeks was a pleasant surprise, the more recent correction was anything but unexpected. As impressive as the rise right through the psychological 13,000 barrier has been, profit taking was in order. Yet this is an over simplistic view of the situation. A number of questions remain, hence the undertones of punter excitement in most week-end market reports. One, the sudden rush of volumes that buoyed the market has yet to be explained. Deficits are in red, growth is retarding, revenue is shrinking, and the overall economy is near dysfunctional. Still the stock market decoupled from the real economy. Why? Two, there is little agreement among brokers regarding relevance of political developments. Is the market blinking because of existential worries in the PM house? If, in the worst case market scenario, heads roll in the highest tiers of the government, will the market really rally, as some have dared declare? Or are pundits restricting themselves to technicals and charts, not taking cue from fundamental indicators? Three, are we about half way through yet another replay or replays? Is this Mar ’04, Jun ’07, Aug ’08 all over again, when black money filtered through the market, bidding it up, luring smaller, more innocent investors, only to leave another collapse, more fingers burnt? The new week will not provide credible answers to most of these questions. But it will tell how much the market has moved away from the real economy. Or whether the previous week’s sell off was more than prudent profit taking. Maybe the system has been misused yet again. If that is so, the welcome return of risk is not cause for joy. Rather, it should warn those with less (financial) muscle to stay away, and prompt the regulator to jump in. Either way, we will watch closely.
