Making sense of the sensex

Most investors track the movement of the 'sensex' or the 'nifty' only. This can be utterly misleading at times. The sensex had closed the last week (4.01.2008) at 20686, and it has closed today (10.1.2008) at 20582, after touching a high of 21200 intraday. This represents a fall of 0.5% only. But the broader market represented by other indeces like bse midcap and bse small cap has fallen by over 10% during the past 4 days. The sentiment of the market can be judged by other indicators more appropriately.

1. sensex and the nifty have different methods of allocating weights to the stocks comprising the index. nifty allocates weights to the stocks based on their market capitalisation, whereas the sensex weights are calculated on the basis of floating stock of the index stocks. On the basis of current prices top 5 scrips on the sensex have a combined weightage of 45%, with reliance contributing 15.6% and icici bank contributing 10.4%. The operators can paint a rosy picture for the sensex by romping up these few stocks. Similarly on the nifty top 5 scrips have a combined weightage of over 36%, with reliance contributing 12.3% and ongc 7.7%. Infact this has been the story of sensex and nifty rise during the recent highs, whreas the broader market was giving opposite signals.

2. advance-decline ratios are an indicator of the overall health of the markets. analysis of the markets for the past 4 days indicated a very negative signal from the advance decline ratio, like in todays markets this ratio was terribly negative 1:9, that means 9 out of ten stocks were in the declining mode.

3. volumes or turnover also helps us in understanding the future signals for the market. if the broader markets are declining with high turnover, it does not auger well for the markets.

The writing on the wall is clear. Although the sensex and nifty are still not showing any signs of a major decline, the damage is deeper at the broader level. there is still some downside left before the market stabilises. It is, however, a good time to hunt for your favourite midcaps that have taken a beating in excess of 10-15% over the past 4-5 days.
Some sectors to look for bargain hunting are:
Banking (specially PSU banks), Auto anciliaries (India is poised to become an export hub for automobiles), Entertainment (Print media, TV media, DTH services and Film exhibition businesses), and Hotels and Hospitality sector.