The number of Sensex stocks which gain every month is reducing steadily. The market appears to be heading for a correction, says Ajay Jindal
WHEN brokers start trying funny stunts to rig the market (not that they don’t try all the time) it is time to be cautious. It ap pears that there was a motivat ed attempt to make the Sensex touch 14000 level last week When the market opened last Tuesday, a broker placed an or der in Reliance Industries at price much higher than Mon day’s closing, single-handedly sending the Sensex soaring. As of now, it isn’t clear what ac tion is being taken by the regu latory authorities or the con cerned exchange to curb this kind of suspicious activity.
For the retail investor, this suggests it is time to be cautious The market has been on a one way mad ride since June. The Sensex has now risen 57% in less than six months from the June level of 8900. The market needs to step back a bit and relax for a while.
Even Sensex scrips seem to be getting tired of this hard climb. There are signs that the strength of the Sensex rally is dissipating. The Sensex rise is not broad-based anymore. In the past four months, the number of companies which have risen for each month has reduced steadily.
In November ’06, only 17 out of the 30 Sensex companies closed the month higher than their October closing. In contrast, in August ’06, 29 of the 30 Sensex companies had risen. Between August and November, the number of companies which rose for the month has fallen steadily. A majority of Sensex stocks is still rising, which perhaps explains why the Sensex itself has continued to rise every month.
It is quite apparent that there need not be a great relation between the rise of the Sensex and the number of Sensex stocks which rise (see table ‘Too Fast, Too Furious?’). For example, in September ’06, 25 of the 30 Sensex stocks made gains, while the Sensex rose 755 points in that month. In November, the Sensex gained almost 738 points, while only 17 companies rose.
The movement of Sensex companies in November has been rather peculiar, and also somewhat different from earlier months. In November, a few Sensex stocks witnessed a sharp increase, much larger that what is normally expected from a large cap. This is, perhaps, another factor which explains the almost unchanged pace of the rise of the Sensex, despite the falling number of participating stocks participating.
In November ’06, for example, as many as 10 Sensex stocks gained more than 10%. In contrast, in August and September ’06, only seven Sensex stocks rose more than 10%. In October ’06, only four stocks rose more than 10%. So, if only a few Sensex stocks are rising, then they should make sharp gains for the Sensex to go up strongly.
The maximum rise of any Sensex stock in a month was seen in November, when Gujarat Ambuja Cements gained rose 21%. In the previous three months, the maximum rise of any company listed on the Sensex was normally around 15-16%. In other words, investors are picking up a few Sensex stocks now, and pushing them up to ensure that the Sensex keeps rising.
Sooner or later, this game has to stop. A section of the market believes a correction could take place once the Cairn Energy IPO is through. We will know in a week.
(Courtsey: Economic Times, Bangalore Ed, December 11, 2006 :
Article )
