Date:11/10/2004 URL: http://www.thehindubusinessline.com/2004/10/11/stories/2004101101960400.htm

Back Temporary cooldown likely

Jayanta Mallick

Historically speaking, excessive flow of liquidity into the domestic market usually causes euphoria while negative news are glossed over and ignored.

THE key indices have scaled an altitude that may cause fear of height for many in the short-term. The psychology of the market makers, at such crossroads, normally tilts towards a correction.

However, the money flow makes the crucial difference in the quality of correction.

Massive flow of funds has seen the BSE Sensex and the S&P CNX Nifty reach close to their all-time highs achieved in January this year.

The lesser (and broader) indices such as the CNX Midcap 200 and the BSE TECk indices have topped their earlier peaks.

Last week, the Sensex underperformed the Nifty in percentage terms. The former went up by 1.45 per cent, while the latter 2.40 per cent. The BSE Consumer Durables index registered an 8.62 per cent jump. The BSE Healthcare and the FMCG indices, however, weakened.

Foreign institutional investors (FIIs) pumped in an additional investment of Rs 1,114 crore, a record of sort. The market breadth remained distinctly positive at the end of the last week after beginning the week with an even score.

Interestingly, FIIs, who had sucked out Rs 3,250 crore from the system in May last, poured in more than double in the period between June and September.

Historically speaking, excessive flow of liquidity into the domestic market usually causes euphoria while negative news are glossed over and ignored. In euphoric phase, the price determines the demand and supply.

If you go by laws of economics, you are likely to be foxed.

The very same economic fundamentals may cause a sharp fall suddenly amid the euphoria.

Fundamental signals, which the market has ignored, make an interesting list. The US light crude oil hit a new record of $53 a barrel in overnight trade on the weekend, up some 60 per cent since the start of 2004. Also on Friday, the yield on 10-year 7.37 per cent benchmark government security (GS 2014) closed at 6.56 per cent compared to the previous close 6.59 per cent. The intra-day low was recorded at 6.50 per cent after the release of the inflation data.

India depends on imports for about 70 per cent its crude oil requirement.

The spiralling crude price, patchy rains and interest-adjusted inflation have so far been ignored. But now, with the corporate growth expectations fully factored into the prices, the key indices look overbought and unsteady.

As the corporate results start coming in for the second quarter, market may begin a temporary climb-down as the bulls cream off the profits selectively.

The technical charts suggest a short-term reversal in the benchmarks. As the traders are likely to pick up the technical signals, it may accentuate the trend in the next couple of weeks unless the liquidity flow sweeps them off their feet.