Excess Volatility – a sign of nervousness and therefore weakness

The markets last week were on tenterhooks and it appeared that they were sitting on a volcano. We had a terrible Tuesday and a terrific Thursday and Feel Fine Friday to end the week. Three day of fall was worth 979 points on the SENSEX and 293 points on NIFTY with terrible Tuesday accounting for 855 points or 87% of the fall. Similarly on the NIFTY Tuesday was 251 points or 85% of the fall. The rally on Thursday was worth 366 points on the SENSEX and 132 points on the NIFTY. Net change for the week was a loss of 429 points on the SENSEX and 111 points on the NIFTY.
What does excess volatility indicate? It suggests that markets are nervous and hence extreme views in a short time. Why then extreme views? There is news flow both positive and negative and traders are unable to call the trend from this news flow. More often than not nervousness leads to weakness and I am of the firm opinion that our current market technical indicate that we are likely to consolidate in the short term.
NCML industries Limited withdrew its IPO even after extending it for the maximum period allowed. The issue was open for five days initially and then extended by another five days to keep it open for ten days in all. One fails to understand why promoters and merchant bankers are not willing to market the issue by organising road shows in the two major cities of Mumbai and Ahmedabad where the bulk of subscription happens?
The government has after the winter session promulgated eight ordinances and it appears that Congress has decided to oppose these ordinances. In case the Rajya Sabha is again disrupted there is a certainty of a Joint session of Parliament being convened immediately after the budget session gets over. This would be the 4th such sitting of the joint session with the last one being in 2002 when Atal Behari Vajpayee was the PM and the ‘POTA’ bill was passed. The passing of these bills becomes important because the will and intent of the government is necessary to be demonstrated. While the passing of the ordinances would be crucial, the mere convening of the joint session would send stock markets booming. The failure to call one would amount to there being lack of will power in introducing reforms and would lead to a sharp fall in markets.
Markets are currently looking confused and under excess volatility. They need to cool off and a period of consolidation of say two to three weeks will be ideal for it. Post this period even the pre-budget rally would be in place. Trade cautiously.

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