Muhurat trading for Samvat 2070 began positively and markets after an initial hurrah closed positive but without the usual firework. The closing was just about positive as far as the benchmark indices were concerned but gains of over 1% in the midcap and smallcap. Probably it is with the general feeling of being environment friendly that there were less fireworks in the city and hardly any at Dalal Street. The New Year has begun on a very sombre note and the markets after going through severe volatility in August and September 2013 seem to be settling down into a smooth overdrive and pushing upwards.Muhurat trading for Samvat 2070 began positively and markets after an initial hurrah closed positive but without the usual firework. The closing was just about positive as far as the benchmark indices were concerned but gains of over 1% in the midcap and smallcap. Probably it is with the general feeling of being environment friendly that there were less fireworks in the city and hardly any at Dalal Street. The New Year has begun on a very sombre note and the markets after going through severe volatility in August and September 2013 seem to be settling down into a smooth overdrive and pushing upwards.

The biggest concerns about the current rally are broadly speaking two. The first is the poor fundamentals like the economy, GDP, high inflation, slowdown etc. The second which is really worrisome from the market perspective is the lack of breadth of the current rally. Though the SENSEX has moved from a low of 17,450 in end August to 21,200 in the beginning of November, a gain of almost 2,750 points or 21.5%, it is led by a few stocks and restricted to only the benchmark indices. The midcap and smallcap have not participated and are actually negative with the midcap down about 40% and the smallcap down almost 60%. The retail is not happy and is therefore not participating. Mutual funds are seeing huge redemptions and investors just don’t want to do anything with equities.

The Index is at a new high and people want to know whether they should rejoice or not? Well they have every reason not to feel happy. In five years money invested in a fixed deposit even at 9% compounded would have grown 54% which means an index of 21,000 should have become 32,300. A few select stocks like ITC, Hindustan Unilever and TCS have been the major beneficiaries of this rally while stocks like Tata Steel and Reliance Industries have borne the brunt of the fall. The ADAG group stocks have destroyed wealth of investors with stocks like Reliance Power and Reliance Energy being major contributors in the fall. They have subsequently been removed from the benchmark indices.

Midcap and smallcap is always a dangerous area and seasoned player have also fallen prey to timing and wrong stock selection. To be successful here one needs to be patient or actually super patient and there must be no leveraging done.

Markets are riding the twin horses of global liquidity and with tapering certainly not happening in the next 4-6 months the flows will remain strong. The second horse being ridden is the betting on a change in government and one party being given a mandate to rule. There appears a growing feeling that we need a change and the markets are betting on this happening. The markets particularly the SENSEX and NIFTY will in the next five weeks be volatile but trade with a positive bias. The midcap and smallcap should play catch up and outperform the benchmark indices. As a first step towards this the midcap outperformed the benchmark indices this week and on Muhurat trading while the benchmark indices were marginally positive the midcap and smallcap gained over 1% each.

The scenario as depicted above makes measured and well calculated investment in midcap and smallcap stocks advisable with a 4-5 week horizon. Invest in fundamentally solid companies and with a past track record. The slowdown has hit a lot of companies and it may take some time to recover but it is only in such times that one gets to buy stocks which are that much cheaper.

HAPPY DIWALI AND PROFITABLE INVESTING