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What If...

Here is an outline of a market conspiracy theory

What if somebody knew the exit poll results in advance. And, they really did predict a clear majority for the Congress. But this somebody ‘prevailed’ upon the polling agencies to build on the consensus that the United Progressive Alliance (UPA) was headed towards 200 seats. Or, the polling agencies really weren’t that smart, and did not see such a huge surprise coming.

Sophisticated investors know that every time the “uncertainty quotient” in the markets goes up, there is a dip on a minor sell-off as the market waits for the uncertainty to clear. That is when ‘intelligent’ investors chip in, buying and holding to wait out the uncertainty. This is where the high net worth (HNI) traders make a lot of money, always trading against the market, banking on a reversal as fundamentals work themselves out.

So maybe, as the consensus built up that the UPA was going to get 216 seats, HNIs went short on the market, betting that the increased uncertainty (over Govt formation) would lead to a correction in the Sensex. And on the other side, a bull cartel developed, which had information that there was a surprise awaiting….

That is why the Sensex treaded water through the uncertainty, which should have given the bears the smell of a typhoon developing. But they didn’t run, and their selling was absorbed at higher levels by the bull cartel.

And then… mayhem!!!

The worst stocks, the most unlikely risers, hit the roof. They were all on the Sensex, which shot the market through the roof, led by exactly those stocks which were fundamentally the weakest, which ‘intelligent’ HNIs would have shorted.

Real estate, banking, infrastructure… the same old suspects. What is it about these discredited stocks that suddenly excites the market, even after their current reality and future prospects are well-known? Not HUL, ITC, what not. They called it “satta phansa” in the days of Harshad Mehta.

How do we know whether my theory is true? Well, if it manages to explain the subsequent facts. Watch out now, for a return to reality -- a slow dying out of the rally -- a sell-off on some minor pretext. The money made by the bull cartel will now be deployed in the actual mid-caps which have superior fundamentals. The market will fall, at least the broader mainstream indices, but the beta of certain stocks will not track that of the market. The “Beta Divergence” will expand with a broader range, including some negative betas (i.e. some stocks will be flat or rising even as the broader market is falling).

I hate putting numbers to my forecasts, but maybe the market might retrace the entire recent rise, or at least 70 per cent. My surmise: there are no genuine buyers in this rally. Nobody bought Infosys at Rs 1,800, just after they had put out such a dim prognosis. Only the shorts were covering and as their demand fizzles out, Infosys will limp back (as it already is doing). The same for DLF, Unitech and ICICI.

Yes, the action will shift to mid-caps with real stories. The net result: you will have a stock-specific market, but the broader indices will remain in a range-bound band. “Intelligent” HNIs will get rich, if they get their specific stocks right, but a broad liquidity-driven rally is unlikely in the short run.

Still, I remain bullish. There is always the possibility that Foreign Institutional Investors (FIIs) will allocate more money to India than is necessary, creating liquidity and momentum. But that will increase volatility, and you have to get that right.

All in all, it will remain a trader’s market, the profits going to the person who sells correctly. Buying will be rewarded at all levels, provided you have staying power.

Sanjeev Pandiya teaches trades and writes
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