GalaTime

Pick any major market and you’ll notice a common theme of late - a significant increase in volatility:

USD:INR (Dollar:Rupee) exchange rate

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Gold

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S&P CNX Nifty-50 market index

Volatility is mean-reverting, and we hadn’t see much of it for a while, so this was expected. Moreover, volatility has a tendency to jump up during major market tops, and combined with other observations, can help us gauge whether markets are about to roll over.

A big distribution day, with the major indices falling over 2%, and market statistics (A/D, TRIN, etc.) in correction territory. Over the past 3 days, both FIIs and mutual funds have made relatively small investments into the markets. As you can see in MoneyControl’s market map, no sectors were spared:

And if you have any doubts about retail interest in the current bull market, rest assured that nobody’s missing the boat - after all, CNBC-TV18 is hosting a show called “Saas, Bahu aur Sensex”, as a special for housewives who (day) trade!

PS: It seems FIIs net sales amounted to ~ $120M today.

Check out Sucheta Dalal’s perspective on the hype & hoopla surrounding the RPL issue: 3 newsworthy items came out during the subscription period and took the final IPO amount to Rs 147,000 crore!

1. Chevron’s 5% stake in RPL

2. Oil find in the Godavari basin

3. Reports that SEBI allowed Chevron to become a co-promoter of RPL

On a somewhat related note, Sucheta talks about the use of land/asset-based valuation to justify the current bullish sentiment (Sensex 12k, DLF IPO and such). One item of interest (noted in an earlier post of mine) - “domestic funds seem to be the biggest investors in last week’s rally that took the Sensex past 12,000, while FIIs were relatively unimpressed by secondary market developments.”

A couple of interest reads via Bloomberg:

* IMF raised its 2006 growth forecast for the Indian economy from 6.3% to 7.3%, keeping its #2 position among Asian countries. The only concern - “With monetary conditions still accommodative and credit expanding strongly, further interest-rate increases will likely be needed in India”.

* An excellent piece on the retail boom in India, with statistics on the retail chain market, major players, spending trends, strategies, and stocks.

With the large moves in Infosys & TCS this week, the IT sector has topped the performance chart (via ICICIDirect):

So what’s next? If we take a look at the sector’s relative performance over the past 3 months, it’s not done as well.

At the risk of repeating myself, I think that if the market continues to move higher, IT will play catch-up and show relative strength in the short-term. There are concerns about valuation, but I think the key drivers (economic growth, corporate IT spending, exchange rates and such) of IT earnings are quite supportive, for now atleast. Details on sector constituents can be found here.

More good news for India (and emerging markets, in general) - BCA Research continues to be bullish:

Of interest - “there is little froth in capital flows as both net portfolio and FDI inflows as a share of emerging countries’ GDP are subdued.”. Does this mean that the current rally is being primarily driven by domestic investors?  Further, is it domestic institutional investors or retail participants?

The Reserve Bank of India (RBI) recently left short-term interest rates unchanged, inspite of widespread expectations of a hike. This was generally taken as a pleasant surprise, indicative of manageable inflation, no concerns about asset bubbles, and such. For example, Morgan Stanley’s opinion was mostly positive, with some expectations of a rise in interest rates in the intermediate-term.

My interest though is in how this’ll impact the dollar:rupee rate and gold prices. If the US Fed continues its rate hikes, we should expect the rupee to continue south to the 45.7 - 46 range pretty soon. Gold, although volatile, also stands to benefit from a weaker rupee and the bull run in commodities. Shall we see 10k per 10gms soon? As for the market, lower interest rates (lower borrowing costs) will sustain strong corporate earnings and consumer spending - no complaints there!