DAY TRADERS GALORE: Their enthusiasm drives the markets

Ketan Parekh, the attack of the bears, UTI, 9-11, the attack on Parliament...that was 2001.

A pedestrian budget, Godhra, Gujarat, the Home Trade scam, the possibility of war... that has been 2002 until now.

Now, some analysts will explain the behaviour of the Indian stockmarket using one, or a combination of these reasons. Others will pull out that old chestnut about the month of May. Of how India's nuclear tests in 1998, and the Kargil war in 1999, caused mini market meltdowns. ''That's happening again, now,'' they'll state confidently. At first sight that rings true: fears of another war have shaved, in 15 trading sessions, Rs 42,627 crore off the market capitalisation of all stocks on Bombay Stock Exchange.

The smarter analysts will also point out the obvious difference between this May and the previous ones. The Sensex was already on a bottom-trawling expedition this year when things started to go bad. Fear and loathing on D-street, though, doesn't explain a few things.

Such as, why has the Sensex navigated a narrow range between 3,200 and 3,600 since January 2002?

Such as, why have lesser known scrips with relatively low market capitalisation suddenly emerged trade-favourites?

Such as, why isn't the market going up when everyone has been chanting the buy-now-for-things-will-surely-look-up value investing mantra for a good part of the last year?

Such as, why are domestic mutual funds and Foreign Institutional Investors absent from the market?

And such as, why are broad indices like BSE 200, BSE 500, even CNX 500 stable or gaining, even as the Sensex is falling?

This article started off as an effort to explain these. It does that to an extent, but hey, no one has all the answers-indeed, if the market runs true to its fickle form, it could be booming by the time you read this.

She Was A Day Trader

It happens in every suburb of Mumbai, and in small towns in Maharashtra, Gujarat, Andhra Pradesh and Kerala. It happens at 10.00 a.m every morning, except on days when there's no trading. Typically, the 'happening' concerns a motley crowd of 50, housewives, retirees, execs from nearby offices, waiting to execute their orders. They are day traders, people who buy and sell shares first thing in the morning and square their positions by end of trading the same day. The word on the Street is that 90 per cent of all brokers cater to the retail market today. ''Day traders are ruling the market,'' says Samir Dholakia, Director, Balance Equity Broking. Even on a dull day, brokers in Nagpur in Maharashtra or Porbandar in Gujarat boast turnovers of Rs 5-6 crore a day. Nilesh Shah, a Senior Vice President at Kotak Mahindra Securities believes that is only to be expected. ''In an uncertain environment there are more traders than investors.'' That could also explain the market's volatility: even the slightest thing can set day traders off. And it can certainly explain the popularity of mid-cap, second-tier tech and public sector stocks. Day traders rarely deal in large-cap stocks.

Beware, Here Be bulls

Drop into the just-around-the-corner-from-D-street office of Rakesh Jhunjhunwala, trader, investor, and man in the news for acquiring a 10 per cent stake in rating agency Crisil and be prepared to be overwhelmed by trading activity of the kind the Street hasn't seen since February 2000. Jhunjhunwala believes ''we are in structural bull market'', and quotes stockmarket maven Marc Faber (aka Dr Doom) on how bull markets are typically conceived in the depths of depression and reared by rising corporate profits and falling interest rates. ''The reversal of September 2001 will decisively take the Sensex to a higher level,'' gushes Jhunjhunwala. His take: the economy will be clipping along at 10-12 per cent in 24 to 48 months and the stockmarket will recognise it in advance. There may be few takers for Jhunjhunwala's brand of optimism but fact is, such Polyannaism is what keeps a check on the bears.

Surely, There Must Be Bears.

The bears are never very far away. Just a few kilometres away from Jhunjhunwala's office, at the Oxford Book Store at Churchgate, one of them, Chandrakant Sampat is discussing Stephen Jay Gould's theory of punctuated-equilibrium and the Indian capital markets with a few brokers, analysts, and fund managers. Sampat, India's own Warren Buffet (on a smaller scale) made his money in the stockmarket in the past decade by betting on companies like HLL and Nestlé but has since turned a bear. Cash and cash equivalents constitute the bulk of his portfolio these days. Reason? ''India's huge fiscal deficit could soon get the country into a Latin America kind of situation.'' That's an extreme view. Only, with day traders, bulls, and bears pulling in several directions all at once is it any wonder that the veneer of stability the market has acquired by moving within a limited range hides an almost visceral proclivity to swing wildly?

How Speculative Is Speculative?

Most day traders are retail investors, although the appellation investor does seem a bit out of place here. Even the retail investors who don't believe in day trading are in for the short-term. On May 28, for instance, Rashtriya Chemicals and Fertilisers was quoting at Rs 27.90. By May 31, it was quoting at Rs 34, an increase of 25 per cent in just four days. RCF was benefiting from the impetus to PSU stocks provided by the government's ongoing disinvestment process. Other stocks to benefit include HMT, IOC, Bongaigaon Refineries, and BHEL. Hindustan Zinc has been riding the crest of an upswing for a week now (till May 31, 2002). Privatisation, clearly, has emerged a proxy for the government's economic performance. And it is making the stockmarket take a long hard look at the latent value on some public sector companies. Such as Container Corporation (Concor). The investment required to replicate the infrastructural strengths of this company could be in the region of Rs 5,000 crore.

It isn't just PSU stocks that are finding favour with speculators; so are second-rung it scrips like Aftek Infosys, Polaris, and Mastek. Their valuations may be attractive but these are volatile stocks. This flowering of the also-rans has resulted in a phenomenon analysts term ''breadth of market''. ''Several companies are quoting at a discount to their intrinsic value and provide value unlocking opportunities,'' explains Shah of Kotak. And a report of brokerage CLSA claims there is room for the re-rating of manufacturing companies such as Tisco, Nalco, Grasim, and Cummins on the strength of their efforts to become more competitive.

THE TRADING ROOM AT FII MORGAN STANLEY: They's sellers, not buyers

Then, There's The War...

...or fears of one. ''Markets don't like political uncertainty or the fear of war,'' says Devesh Kumar, head of equities at ICICI Securities. If there's a war-if-the stockmarket could crash a few hundred points more before starting to rise again. At the time this magazine was going to press, on June 1, the stockmarket had seemingly stabilised, an indication, explains Ridham Desai, Strategist, JM Morgan Stanley, that the, ''markets have still not discounted war.''

The stockmarket does fall in times of war but recovers quickly. It did during the Kargil war when the Sensex fell 2.5 per cent on May 26, 1999 and 3.1 per cent over the week, but recovered 7.1 per cent over the following month. That's true of most wars, explains Shah of Kotak. ''The break out of war signals the fag-end of the bear market.'' Adds Jhunjhunwala, ''History shows that wars generally result in an ultimate rise in stockmarkets.''

So, Who's Playing The Markets?

The FIIs were sellers in May, not buyers. Most domestic institutions and mutual funds too have been sellers. The specifics: the FIIs were net investors to the extent of Rs 11.6 crore in April, net sellers to that of Rs 56 crore in May. And domestic institutions were net sellers to the extent of Rs 196.96 crore in May. FIIs prefer Korea, Taiwan, even Indonesia to India-and that was before fears of war set in. The Indian stockmarket has lagged behind the average emerging market by 10 per cent since September 21, 2001, and 15 per cent over the past two years. Expectedly, India's weightage in the Morgan Stanley Capital International (MSCI) emerging markets index has plunged from 10.9 per cent in February 2000, to 3.93 per cent in May 2002.

All is not lost. Some equity funds did see net inflows in April and Jyotivardan Jaipuria, the head of research at DSP Merrill Lynch says, ''this is sign of retail money coming back to the market''. And a recent survey of domestic fund managers conducted by the firm shows that domestic investors continue to be optimistic despite fears of war. Still, with institutional investors shying away, the day traders rule large.

And where's the market headed?

Day traders, highly speculative trades, the privatisation effect, eternally optimistic bulls, gloomier-than-gloomy bears... what do these mean for the market? In one word, unpredictability. It isn't that there are no signs to be read. There are plenty, and most are positive (yes, we're serious). The market (make that the broad market) has fallen by a mere 4 per cent in the last month and investment analysts are recommending that investors buy whenever a stock dips. ''Any dip is a buying opportunity,'' affirms Ajit Surana of Dimensional Securities.

There's also the economy angle: the big E is expected to recover smartly this year and increasing capacity utilisation across sectors (it's not a big increase, but it is there) indicates that this is beginning to happen. Jaipuria of DSP ML expects that the index of industrial production grew at least 3 per cent in April 2002, but is worried by ''the absence of recovery in consumer sectors''.

War or no war, the market is close to its 8-10 year average and the chances of it going lower appear remote. ''If the war doesn't happen,'' qualifies Desai of Morgan Stanley.

Our recommendation: if you are in it for the long term, go ahead and invest; the markets are as close to bottom as they can get. But if you have a time horizon of six months hold your bets. The onset of hostilities could see the value of your investments erode.