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Wednesday, April 23, 2014

Key risks for the stock market – a guest post

When stock market indices keep touching new highs on a daily basis, the biggest risk that small investors face is getting the urge to jump in by throwing caution to the winds.

Unexpected election results and possibility of El Nino conditions that can cause a less-than-adequate monsoon are other risks that are being faced by the market.

The stock market appears to be discounting the most optimistic post-election scenario – a NaMo led NDA government with a majority. That may or may not happen.

In a guest post, Nishit introduces a note of caution by discussing less optimistic post-election scenarios that can derail the current rally.

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The market is going up as if there is no ceiling. Every day one sees their portfolios increase in value and everyone seems to be getting swept up by the Modi wave. Now, let us try and see what can derail this rally.

The level of 6350 is a very critical level on the Nifty. It has been broken upwards after being tested 3 or 4 times over a 6 year period. In technical parlance, this is known as a major breakout and 6350 becomes a key support level for the market now.

This also means that since Nifty has broken 6350 level convincingly and stayed above for several weeks now, it may not go below that level.

What could be the key risks for the market now?

1. No Modi or BJP led Government at the centre

The Congress fights back just to garner enough seats to prop up a third front government. Not out of the realms of probability if the Congress manages 130-140 seats. In this case, the market would tank straight away.

2. Modi wins and El Nino causes a drought

In this case, the markets would rally after the elections, stay in the 7000+ zone for a few weeks and by mid June start drifting down when reality strikes. The upside would remain capped then.

3. BJP has to hunt for allies to cobble up a majority

If the BJP led NDA ends up with 200-225 seats and have to take on board allies who will demand an alternative PM candidate than Modi, the rally would get tempered. It would again lead to a scenario where there is a weak Prime Minister in place, say someone like a Rajnath Singh.

By rallying before the election results, the markets have moved to the side of extreme optimism. Remember the rally is based on FII inflows which is banking on a Modi-led stable Government in place which is investor friendly making India a good place to do business.

A drought like scenario will push up inflation, raising interest rates and delaying the economic recovery. The markets at 7200-7500 will not factor all this.

Nifty will definitely test 6350 once - whether before the elections or after the elections is the question. Also, the question remains what happens to the 3700-3900 ‘gap’ of the previous election results? Will it remain unfilled or will these elections results close that ‘gap’?

Penny stocks have started rallying now. It could be a good chance to remove the junk from the portfolio. If one is holding quality stocks in the portfolio they can always be averaged out at a later date. Good businesses always bounce back.

All eyes will now be on May 16th 2014.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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