As excess liquidity rocks the markets, investors have to hang on to the roller coaster
Volatility, it has been said, is a car with two pedals: the brake pedal is fear, and the accelerator is greed. Both are the principal drivers of the stockmarkets. The uncertainty of the past six weeks has enhanced market volatility. All you have to do is look at the swings, both intra-day and intra-week. On Tuesday, 10 November for example, the Bombay Stock Exchange (BSE) Sensitive Index (Sensex) swung between 16371 and 16677 during the day. In the four preceding trading days, the market had risen by just over 7 per cent (see ‘Mood Swings’).
It is the first-of-a-kind for everyone. Intra-day volatility is becoming a way of life in the equity markets, and bond markets too. Quite often, the sentiment when the market opens is vastly different because brokerage firms have made some recommendations, which subsequently may have proved to be misleading, even wrong.
Dhirendra Kumar, head of Value Research in New Delhi, points out that when the market rebound began about four months ago, most fund managers — especially the domestic ones — kept waiting on the sidelines. When they rushed in, the market zoomed even higher with all the excess liquidity. Then came the Reserve Bank of India’s monetary policy review that suggested the beginning of an exit policy. Fears of a liquidity squeeze then drove the market down.
“Few fundamentals have improved sufficiently to stabilise the market,” says a fund manager who wished to remain anonymous. “More importantly, the cycles are becoming shorter, which indicates a long-term trend of increasing volatility. Ten years ago, the bear cycles would typically last four or five years. Then it came down to two years or so. The current cycle was just for a few months…”
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