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The last two crashes in Indian Stock market (May 2004 & May 2006) has experienced are unique because it recovered much faster than it generally does in a crash. And the credit for that goes to Mr. P Chidambaram the Finance Minister.
Every speculative market like Stock Market has inherent tendency to build up bubble. Margin trading, F & O, derivatives are all methods to increase speculation. And all these financial innovations are nothing but a step to circumvent regulation which tries to curb speculation. As the market goes up everybody is leveraging himself to take maximum exposure hence gain maximum from the rise. But when the market falls they also bear maximum loss.
Stock markets has a system called stop loss where after a certain fall the bulls book losses to stop further loss adding to selling pressure. Added to this the brokers have to revise the margin requirement for their clients forcing them to sell at loss and adding to selling pressure. This is snow ball effect and hence it’s called a Bubble.
Mr. Chidambaram is a veteran of the financial markets and knows this very well. Hence in May 2004 after BJP lost the elections and Congress came to power, he through the government controlled Financial Institutions made sure that this snow ball falling down the hill is stopped in between hence not leading to crash. He was successful then and managed to control triggers like stop loss and margin plays. Many people who were saved in that crash should thank him. Gaining confidence from his last success he did the same in May 2006 crash and successfully again. He managed to prove me wrong for a long time (http://neerajgutgutia.blogspot.com/2005/09/stock-market-burst-is-inevitable.html ) but lets see if he can repeat it this time. He might, he might not but remember each time he does that the snow ball is building up latent energy and increases the chances of bigger fall the next time and ‘faster fall’.
My analysis says that market should not be above 9000. Lets see whether he is able to delay the bust further. Even if he is successful this time, remember is can just delay it.
Another trend worth noting is that most these crash like situation happens around the time when a high profile IPO is getting listed. (The reason of the same might be that lot of cash which was circulating in the market and building the bubble get locked up for month or so in the IPO). Last time it was Air Deccan, this time it is Cairn India. And if Mr. Chidambaram manages to hold the snow ball for a while, the next might be DLF IPO.
Sorry readers if this read like salt in your wounds but you deserve it. Remember Mr. Chidambaram by protecting you every time is just exposing you to bigger risk. I feel like humming " Kab tak chupaogi jawani o rani......"
Every speculative market like Stock Market has inherent tendency to build up bubble. Margin trading, F & O, derivatives are all methods to increase speculation. And all these financial innovations are nothing but a step to circumvent regulation which tries to curb speculation. As the market goes up everybody is leveraging himself to take maximum exposure hence gain maximum from the rise. But when the market falls they also bear maximum loss.
Stock markets has a system called stop loss where after a certain fall the bulls book losses to stop further loss adding to selling pressure. Added to this the brokers have to revise the margin requirement for their clients forcing them to sell at loss and adding to selling pressure. This is snow ball effect and hence it’s called a Bubble.
Mr. Chidambaram is a veteran of the financial markets and knows this very well. Hence in May 2004 after BJP lost the elections and Congress came to power, he through the government controlled Financial Institutions made sure that this snow ball falling down the hill is stopped in between hence not leading to crash. He was successful then and managed to control triggers like stop loss and margin plays. Many people who were saved in that crash should thank him. Gaining confidence from his last success he did the same in May 2006 crash and successfully again. He managed to prove me wrong for a long time (http://neerajgutgutia.blogspot.com/2005/09/stock-market-burst-is-inevitable.html ) but lets see if he can repeat it this time. He might, he might not but remember each time he does that the snow ball is building up latent energy and increases the chances of bigger fall the next time and ‘faster fall’.
My analysis says that market should not be above 9000. Lets see whether he is able to delay the bust further. Even if he is successful this time, remember is can just delay it.
Another trend worth noting is that most these crash like situation happens around the time when a high profile IPO is getting listed. (The reason of the same might be that lot of cash which was circulating in the market and building the bubble get locked up for month or so in the IPO). Last time it was Air Deccan, this time it is Cairn India. And if Mr. Chidambaram manages to hold the snow ball for a while, the next might be DLF IPO.
Sorry readers if this read like salt in your wounds but you deserve it. Remember Mr. Chidambaram by protecting you every time is just exposing you to bigger risk. I feel like humming " Kab tak chupaogi jawani o rani......"
1 comment:
Dear Neeraj,
As far as I may agree with you on the snowballing and the latent energy to create bigger falls,i think that it is but evident from the simple fact of higher risk-higher returns equilibrium. All the mechanisms that u talk about such as the F&O etc. one must realise that even though they are supposed to be hedging instruments, collectively as a market they are riskier than the original market. A time comes when the overlying market has an effect on the underlying market. thus, when a riskier market has an effect on a less riskier market such as the equity, the effects of the bubble are bound to be profound.
I, however do not agree on the marketgoing below 10,000 mark for two reasons :
a) the human fixation to zeros and the psychological impact that the 10,000 mark has on ppl.
b) the growth in the real assets of the companies forming the underlying stock. Last time we hit bottom was at 9000 mark and this period the growth in assets and the productivity of assets has definitely gone up. Hence even if we take a 10% in nominal growth, assuming a real growth on 5% over the past 6 months, i beleive going sub 10K mark is a long shot.
!!CHEERS!!
Rohit
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