Markets are known by the fact that they are volatile but in the last three weeks or so this volatility has become super volatility. There have been swift 2-3 day moves of close to 1000 points (Sensex) which have happened in alternate directions. Let us look at a few of these moves.

Low of 17,759 on Sensex on 22nd August to 18,728 on 26thAugust.

High of 18,728 on 26th August to low of 17,448 on 28th August

Low of 17,448 on 28th August to high of 19,007 on 3rd September.

Crash on account of Syrian missile attack to low of 18,166 on same date.

The recovery from these levels to the high made on Friday the 6th September of 19,297 points.

From the table below on can see that the movement in the SENSEX has been almost 5,800 points in 12 trading sessions while the net change is 1364 points. Similarly the movement in NIFTY is 1,778 against an actual gain of 378 points. This indicates a lack of interest in the markets and trading volumes have been falling. Secondly people have begun to take larger intraday positions with the hope that a small movement with a larger position will give them the absolute amount of return that they were looking for. With the above volatility even this system has fallen by the wayside and left people poorer.

How does one explain the increased volatility? There are a few possible reasons for the same. One reduced volumes has led to higher volatility. Second FII’s are doing a greater amount of portfolio churning where they sell “A” stock and they buy “B” stock. This leads to volatility in both the stocks which they have bought and sold. Third fundamentals of the market and economy have deteriorated very sharply and hence the fall in interest in the markets. The difference however is that global news have begun to over influence our markets and with low volumes the volatility has magnified.

It does offer trading opportunities to the nimble footed trader, but the market moves so fast and reverses even quicker catching people off guard. One thing however is for sure that our economy is yet to start signalling a turn around and whatever volatility is there is an indication of things not being too good for the country.

The Indian rupee has depreciated very sharply in the last 2-3 months and in the month of August we had the single day’s biggest gain and loss ever being recorded. Incidentally these gains and losses were to the extent of almost Rs 2.50 each. The CAD and fiscal deficit are at alarming levels and with subsidies being where they are, one wonders how the targets set would be achieved.

Diesel price hike is not only inevitable but it needs to be done as soon as possible and to be linked to market prices. Our failure to prune subsidies would see our economy being downgraded by one of the rating agencies sooner than later and this would be a step we can ill afford. This brings us back to the common story of what came first the chicken or the egg. I believe the only way forward is to cut subsidies sharply and address issues where work has been stopped for want of clearances.

The FED meets in the following week and some decision about the withdrawal of quantitative easing in a phased manner would be taken. Our very own RR would be holding his first review meet immediately after the FED review. Incidentally the review meeting date was changed to take into effect what happens in the US. This would be a crucial meetingfor global emerging markets and especially for India where FII investments help in containing the current account deficit. FII’s during the first five months of the calendar year January to May invested Rs 82,000 in India. In the three months June to August they sold in each month and withdrew Rs22,600 crs, while in the first week of September they have invested Rs 1,800 crs. The importance of this inflow can be gauged from the fact that the FM has done roadshows in almost every investing country and appealed to FII’s to invest here. Singapore, Hong Kong, Japan, Germany, UK, the Middle East and the US are some of the destinations where road shows have been held.

Well volatility is certainly here to stay as long as fundamentals and valuations do not justify each other. Enjoy the fruits of it judiciously and make the best of it as long as the good times last.