Should I buy the market bounce and answer other questions

Stock indices ended a six-day losing streak on Tuesday, helped by a late rally in U.S. stocks on Monday. Investor sentiment, however, remains jittery ahead of Wednesday’s US Federal Reserve meeting, where the central bank is expected to hint at the roadmap for higher interest rates throughout the year. tries to answer some of the questions investors are most concerned about.

Why did the market rebound today? Can this last?

Today’s rebound in benchmarks may have more to do with what the market is calling a “relief rally”. When stock prices fall for several days in a row, they are likely to rebound for two reasons. One is to buy from investors and traders who may have sold off at higher levels, and the second is to buy from investors who believe prices have become attractive after a steep decline.

It’s too early to tell if the rebound can last, given that there are short-term negative triggers.

Is the market close to bottoming out?

Again, hard to say. Sentiment has taken a hit over the past week, which could trigger further selling at the slightest sign of weakness in the market. A few months ago, it was a “buy on dip” market. Suddenly it has become a “sell up” market as investors try to get money off the table while they can.

Why are investors nervous?

The main cause for concern is that the US Fed is preparing to signal higher interest rates as it battles runaway inflation in the domestic economy.

Why is this important?

One immediate effect is rising US Treasury bond yields. This causes global investors to shift some of their money into these bonds. These purchases are usually financed by withdrawing money from so-called “risky” assets, such as stocks, commodities and, to a lesser extent, corporate bonds.

So investors are selling stocks and buying US bonds?

Not exactly. Several factors are at play here. When the US Fed raises its rates, the other central banks are also forced to raise their rates to maintain the attractiveness of their country’s debt.

More importantly, rising interest rates hurt short-term corporate margins and weakened consumer confidence, leading to lower spending.

Due to the almost unidirectional rally since March 2020, stock prices had become expensive. The recovery was first sparked by a sudden rush of money, then supported by rising profits as economic activity began to recover. But with earnings set to decline, investors are wondering if stocks should be so expensive.

What about Indian stocks?

Most foreign fund companies view Indian stocks as expensive compared to their Asian counterparts. This could limit inflows into India until foreign investors feel comfortable with valuations.

Does this mean the stock market is about to crash further?

Not necessarily. But much will depend on trends in world markets. What is certain is that stocks listed at absurd valuations – such as the vaunted “new age” tech startups – could continue to take a beating for some time to come as investors shift money to defensive stocks as well as those that look more attractive in terms of earnings potential. .

How much have FIIs sold so far?

Just over Rs 11,000 crore so far in January alone and nearly Rs 9,000 crore in December.

But isn’t domestic liquidity strong enough to offset it?

For now yes. Monthly inflows into mutual funds through SIPs exceed Rs 10,000 crore. But remember, if foreign funds continue to sell at this rate, it’s only a matter of time before domestic liquidity runs out.
Not so much the money that comes in through SIPs, but certainly the money directly invested by high net worth individuals and retail investors. Domestic entries are a function of stock prices. If stock prices fall, investors will not be as enthusiastic about investing.

What about leveraged positions in the market?

The recently introduced SEBI rule requiring brokers to collect the full amount of margin from their retail clients in advance has to some extent reduced selling triggered by an inability to meet margin obligations.

In the past, brokers funded their clients’ margin obligations and allowed them to overtrade. This is no longer the case. Retail clients can now only trade to the extent of the margin they are able to deposit with their brokers.

What about F&O market positions?

Retailers’ exposure to equity and index futures contracts has declined over the past two years due to SEBI’s decision to increase the minimum lot size. This has made futures trading expensive for retail investors.

However, retail investor participation in equity and index options has increased significantly over the past two years. Compared to futures trading, the risk to the system of an accumulation of options contracts is much lower. But investors can suffer heavy losses in case of strong adverse price movements, which can affect domestic liquidity.

What about IPOs?

Reasonably priced IPOs will find takers in any market. But the days when any random company could ask for obscene reviews and get them are over. Many companies will postpone their IPOs, hoping to get a better price later when the market stabilizes.

What should a retail investor do?

If you have mutual fund SIPs running, don’t interrupt them. If you are a direct equity investor, use each rally to sell stocks that were more seasonally flavored and not supported by fundamentals. When it comes to fundamentally sound stocks, wait a while before you start looking to add to existing positions.

(Edited by : Santosh Nair)

First post: STI


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