Turn the clock back to September 17, 2001. Barely six days after two hijacked jets crashed into the World Trade Center towers, Enam Financial, a leading Indian stockbroking firm, put out a startlingly bullish forecast for the Indian bourses, predicting that the Sensex would stunningly rebound from around 2,650 to 4,000, nearly 50 per cent, in a year's time. Well, it's been a year since then and the Sensex, as we go to press, is nowhere near that level-it's languishing at 3,024 (September 20, 2002). We don't know whether the strategists who put together the report-it was Enam's India strategy report-actually ate their words. But if they did, they ought not to be too embarrassed. Because they would have had company at that prandial exercise. Enam's report, titled "Did You Miss The Rally Of 2002?", which predicted that the bounce-back would be led, in rotation, by the pharma, psu, cement, and infotech stocks (none of which happened), wasn't the only upbeat voice on Dalal Street. There were other bulls-in-league. Big trader-operators, like Rakesh Jhunjhunwala, Ramesh Damani, Rakesh Kacholia, and Ajay Dadi, were among the others who bet big on a bounce-back led by PSU stocks. These operators are now in deep hibernation, presumably far away from the Street, where the current mood is quite the opposite of what theirs was.

Says S. Naganath, Chief Investment Officer, DSP Merrill Lynch Investment Managers: ''In the short run (the next three-to-four months) the markets could re-test the lows of September 2001.'' Agrees Arun Kejriwal, CEO, Kejriwal Research and Investment Services: ''A weakness has set in and the market could hit a bottom about four-to-eight weeks from now.''

According to the India Domestic Fund Managers Survey, a DSP-Merrill Lynch study that covers the 10 top fund managers who together manage $48 billion (Rs 2,35,200 crore), while no fund manager is downright bearish over a 12-month period, most have turned more sceptical than they were a year ago and nearly half of them expect the Sensex to remain below 4,000 even a year from now.

The Bears Rule

A tell-tale sign of their mood: fund managers are now increasing the proportion of their funds that they want to keep uninvested in the markets. According to the Merrill study, only 10 per cent of equity and diversified funds are underweight in cash. And a third of the fund managers surveyed now have cash levels of over 12 per cent in their portfolios. The flow of bad news in September hasn't helped boost confidence levels either. The most recent one was when Standard & Poor's downgraded India's domestic debt rating to junk bond grades on September 19. And earlier, the same month, the Cabinet Committee on Disinvestment announced its decision to postpone disinvestment of two state-owned oil majors. The day after the decision, the 30-listed PSUs lost Rs 11,067 crore in market capitalisation.

There's been more to help perpetuate the bearishness. A possible clamp-down on foreign direct investment and a likely stalling of MTNL's disinvestment programme all add to a generally 'feel-not-so-good' factor, with the market interpreting all of it as a serious setback to the overall economic reforms programme. Says Samir Dholakia, Director, Balance Equity: ''Investors as well as traders are tired of the prolonged phase of a range-bound market where nobody is making money.''

The seamier side of a bearish market is when a few dubious players start taking advantage of the lack of genuine players in the market. Last July, suddenly the BSE consumer durable index, comprising stocks like Videocon and BPL, shot up 40 per cent despite the fact that there wasn't any sound fundamental reasons for it to do so: demand for consumer durables has remained flat for the past year or so. The sudden spurt in consumer durable stocks was followed by a sharp slump-a telltale sign perhaps of market manipulation by big operators as large cap stocks peaked. Such are imperfections of the Indian stockmarket that recently, the BSE Sensex and NSE Nifty moved in opposite directions on the very same day because rumours fuelled speculative trading in the shares of one infotech company, whose floating stock (number of outstanding shares that are freely available for trading) is notoriously small.

Indeed, there are whispers on the Street that Ketan Parekh, the main protagonist of last year's scam, may be back in action, with his favourite stocks like Aftek Infosys and HFCL beginning to move once again. Remember the K-10 stocks? Well, now it appears that a number of new favourites may be on the big bull's favourites' list.

Lack Of Action

With trading volumes depressed-average daily trading volumes on BSE in September were down by 10 per cent to Rs 1,160 crore from Rs 1,278.99 crore in May this year-and stock prices moving within a narrow band, it isn't surprising that even day traders, who accounted for 90 per cent of total volumes in May-June this year, are crying off the market. Although day traders (who buy and sell and square up their trades on a daily basis) are still around, they account for around 60 per cent of volumes. Points out Dholakia of Balance Equity: ''Day traders make money in a volatile market or if they can predict a trend. As of now the market seems to be directionless leaving them with limited opportunities.''

The market's bearish listlessness is also reflected in the action of the foreign institutional investors (FIIs). In September, FIIs were net sellers, with net outflows of Rs 595 crore ($122.3 million). Says Brian Brown, CEO and Head of Equities, Salomon Smith Barney: ''There is nothing exciting and the attitude of the FIIs towards India is one of indifference.'' In contrast, FIIs are bullish on a range of other emerging markets, like Korea, Indonesia, and Taiwan. In Korea, a long-drawn process of corporate restructuring has led to FIIs pumping in funds in the last eight months. In India, it has been just the opposite. In July, Credit Lyonnais Securities put a 'stop loss' or 'sell' at Sensex 3,100 level. Given the fact that the Sensex is well below that, a number of FIIs have turned sellers. The Government of Singapore, a big investor usually bullish on Indian stocks with large market capitalisation, has also reportedly turned bearish on India.

Why? After all, Indian companies haven't done too badly-despite the overall slowdown, a sample of 675 companies showed a 36 per cent increase in profits in the first quarter of the current financial year. But stalling of the process of privatisation and a severe setback to the reforms process that could have been a catalyst for attracting FII funds have made FIIs bearish. Says Naganath: ''Emerging markets are getting increasingly localised. You need to improve the local sentiment and tell your story interestingly.'' Plus there are micro-deterrents. Like the uncertainty over the double taxation avoidance treaty with Mauritius, where many of the FIIs active in the Indian market are registered.

Plus, of course, there is the larger US factor. In the US, in July 2002, individual investors withdrew $52.4 billion (Rs 2,56,760 crore) from stock funds, the second biggest cash-out as a percentage of total assets, and the largest ever in sheer dollar volume. Many market watchers interpret this as evidence that individual investors have given up on the market and the economy, suggesting that things will only get worse. Says Ajit Surana, CEO, Dimensional Securities: ''The weakness in the US economy is also dampening sentiments in India. The market believes that without the US economy on a sound footing, we may not see FII inflows.''

Cheap Yet Shunned

Indian stocks are cheap. Yet there are no takers. Take blue-chip Hindustan Lever. Currently quoted at a three-year low of around Rs 165, the Lever stock is down from the Rs 266 it touched on March 1. Like Lever, stocks of as many as 192 companies are quoting near their 52-week lows and around 1,000 at three-month lows. And, according to the DSP Merrill Lynch survey, 30 per cent of fund managers believe that the markets are undervalued.

Yet there's scant interest in picking stocks up cheap. And while conventional Street wisdom suggests that selling isn't the best of strategies when valuations are low, analysts don't rule out a further dropping of valuations.

As for the paradox of lack of demand at cheap prices, it could be that the general sentiment-based on macro dampeners like the slowing down of reforms, the postponement of the disinvestment process and the recent S&P downgrade-have overshadowed the opportunities that low stock valuations offer.

Some believe that the market is waiting for a fresh trigger to kick start demand. Like positive announcements on the reforms process, or perhaps a reversal of trends in global markets, including the US, or even a cut in personal taxes, as has been hinted at by the Finance Minister. Good tidings from the corporate sector may also help. Says Dileep Madgavkar, Chief Information Officer, Prudential ICICI MF: ''If a few large corporates come out with good results for q2 in October, especially against the backdrop of overall gloom, that could be the simplest trigger.''

If triggers like those happen, the markets will certainly respond. For instance, if the government gets serious once again about the economic reforms process, you could expect the markets to bounce back. And if the finance minister, as he has been hinting, comes up with some measures that boost consumer confidence and the economy perks up, you could expect the market to stir alive. But if things like that don't happen, resign yourself to cohabit with the bear for a while.