Equity markets after maintaining a tight range for about 3 months are finally giving signals of a breakdown from the range on the downside. The recent weekly close indicates weakness in the markets as the market is in no mood to discount good news: Crude oil prices have retreated sharply during the week and the advance tax figures of India Inc. have shown a 77% increase y-o-y. On the contrary, market has given more credence to the negative news on the Greek crisis emanating from the international arena. Retail interest in the market has waned significantly in the recent months and FII's have also started to press the panic button. RBI has given ample signals to fight inflation at the cost of growth. The Govt. is grappling with the onslaught of pressure from the opposition as well as civil society activists which has led to a paralysis in the decision making process.
The slow and steady grind of the major stock indices downwards is leading to comparative inactivity on the volumes front. The volatility during the week (measured by the VIX) has also climbed to over 20 towards the weekend. All these factors are pointers towards a short term weakness in the Indian markets. Past experience tells us that the so called momentum stocks are the worst sufferers in a prolonged downturn. Investors holding on to such news driven stocks would be well advised to lighten their portfolio. Certain defensive stocks from front line indices will be good bets to protect the investor's portfolio.
The next downturn in equity markets is more likely to be caused by a catastrophic fall in the real estate prices. The pressure on the Govt. to enact the Lokpal bill and the issue of black money stacked abroad is the primary reason for the impending realty prices crash. This issue can no longer be brushed aside, and the Govt. will be forced to take some corrective steps to redeem its credibility. The Competition commission is aggressively pursuing cases of complaints against some top real estate firms regarding malpractices in their affairs with buyers/ investors. Once this happens, there is fear of a severe liquidity crises in the markets leading to a further downfall in stock prices due to lack of buying support. Before this scenario unfolds, it would be wiser to have a closer look at your portfolio and take suitable remedial measures to protect it from a major downside risk.
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