Anuradha Himatsingka and Basistha Basu/ET/ 15th June, 2006
The Ursa Major and the Ursa Minor are kind of eternal. Bears, as in the animal kingdom, aren’t. But this species is now extinct: the bears of the Indian stock market. They are gone forever.
What has remained, unfortunately, is a memory and a rhetoric that’s more often wrongly used. A bear syndrome in the modern-day stock market context in the subcontinent has come to mean, very simply, a sustained or a staggered, but continuous, fall of the market index, noticeably the sensex.
Perceptions make a big difference. And the general lay view of market index movements is that a rise is always good — the higher, the better. Correspondingly, a fall has always had a negative connotation. The more the index falls, the deeper does the perception dig in that such a trend is bad. The theory that everything which goes up has got to come down, is overruled by sweeping emotions that are governed entirely by the fact that most investors are not able to make money in a falling market.
Bulls, therefore, have always won the popularity sweepstakes on the bourses. That bulls can also gore or trample one down, is something that’s often ignored in the euphoria of a rising market, although Harshad Mehta or Ketan Parekh, or even a Raj Sethia in an earlier era, have been known to have been responsible for situations that left millions mutilated.
So what’s a bear? Classically, a bear is an individual who is basically a safety valve-cum-safety net and, therefore, considered by many a punter as a better judge of price trends. In contrast, a bull is a one-way street, a species that’s known to suffer from two congenital character defects: tiredness and panic.
A quintessential bear moderates an unusual market rise by selling at every higher opportunity, thereby helping an overheated market to let off some steam. He is also a safety net, who buys every time tired or panic-stricken bulls sell in huge quantities to trigger off a market collapse.
Classically again, a market which has both bulls and bears is, theoretically, a more balanced market, as the reverse compulsions work at the same time to moderate the moving averages.
Today, the spot markets of the BSE and NSE do not provide for such an interplay, mainly because of the plethora of changes that have taken place over the years in rules and regulations and also the investment pattern. The stock market now is basically a spot, T+2 system, where the investment joystick is largely in the hands of foreign institutional investors, with domestic funds trying to just trot along on a pure delivery basis.
When big institutional money drives the index, individuals tend to just play along.
There’s more to the sensex crash than just FII selling
The bear, an individual considered by many a punter as being a better judge of price trends, is virtually extinct from the Indian stock market.
Raped as they were quite a number of times in the past, the Securities & Exchange Board of India, as the apex market regulator, has taken ample precautions over the years to ensure that individuals do not get to manipulate price lines or trends, as maybe a Harshad had done or a KP. Period.
The fact of life, therefore, is that bears, as in the classical sense, are as much non-existent today as bulls are from the spot market. What’s driving the market down now is a combination of factors, for some of which the prevalent system is also to blame.
Factor 1:
Foreign institutional investors, commonly referred to as FIIs, have been offloading heavily. So have domestic mutual funds. In thousands of crores. That, by far, has been the major reason why the market has fallen. The regulatory viewpoint is no different. According to the Sebi: “The melting of Asian markets has led to all emerging market funds facing heavy redemption pressures, including India- specific funds. People do not understand markets, which is why they think it has suddenly become bear-driven.”
The regulator went on to add: “Though there is some concern with regard to the increasing deficit in India, markets had climbed up significantly because globally, commodity prices went up. The current market slide is a healthy correction and is in line with the traditional market theme — sell in May and come back in July-August. Valuations had got stretched and serious investors, worldwide and within the country, had believed that there was a lot of froth in the market. Indian valuations have now come to realistic levels.
”If October 31, ’05, is taken as the date since when the markets started zooming, the sensex then was 7892.3 points. From there, till 12671.1 on May 11, ’06 — the sensex didn’t look back once in an unprecedented 4779-point takeoff. Nobody asked a question in the general mood of euphoria.
It’s not uncommon for highly overheated markets to correct up to onethird, and sometimes two-thirds of the rise. From the closing level of 12435.4 points on May 11, a two-thirds correction would have indicated a level of somewhere around 9281 points. So far, the sensex has been floating downwards with strong intermittent rallies to settle at 8929.4 points on Wednesday after breaching the 9000-point barrier along the way. So much for all the fuss.
Factor 2:
A half-baked futures system has also contributed largely to the sensex fall in a situation where the format does not demand deliveries for futures like the spot market does. Since spot market risks are hedged in the futures segment, any meltdown in the spot segment immediately results in long positions getting liquidated indiscriminately in the futures segment. A degree of deliberate over-selling is also not ruled out.
That, plus the fact that automatic margin calls are inevitable whenever the existing margin buffer on the futures market gets exhausted in a meltdown situation, has also contributed somewhat to the fall in equity prices generally on the spot market. Pressured in the hedge segment thus, operators also manipulate spot prices of scrips on the regular market to restore some parity between the spot prices and the hedged rates at which they had taken positions on the futures segment.
Factor 3:
Margin trading is also a contributory factor in the sense that in a falling market situation, the financier has got to call for extra heavy margins or square off positions forcibly. Many believe that in the last month, this has been a contributing factor to the cascading fall as well.
Factor 4:
Last, but not least, day traders have also added their bit in a situation where a very substantial portion of the trading is because of them.
Labels: Market Strategy
On a broader basis, if one were to the look at the adjacent chart, it becomes clear that the margin of safety of the Indian equities (in a broader sense) has been on a decline over the past few months (since May 2005, to be precise). This is while the benchmark index (Sensex) has been on a consistent rise, though with the exception of the recent 'healthy correction.' The decline in margin of safety of the Sensex can be traced to two major factors: 
The second part of the risk with respect to Indian equities arises from the reducing gap between Indian and US yields on the respective benchmark 10-year papers. This carries with itself the 'risk' of the FII money that has chased emerging market equities (including India) in the past few years, flying back to the safer US treasury bills and bonds, which now become relatively more attractive.