Sometime in the second week of May, Vijay Holkar (not his real name) made one of the biggest bloopers of his life: He invested all of Rs 10 lakh in a basket of blue-chip stocks like Hindalco, Reliance Energy, Ranbaxy Labs and Hero Honda. His blunder didn't lie in the stocks he picked; rather, it was the timing that was awful. The markets were at a lifetime high in the 12,600 range, and Holkar was clearly sold on the long-term India story. Unfortunately, global liquidity conditions tightened as interest rates shot up, foreign institutional investors (FIIs) pressed the sell trigger, and the benchmark Sensex slipped into a free fall, crashing 30 per cent by mid-June. Holkar was horrified, as not only had his investment shrunk in a matter of weeks, he also couldn't spot an exit route as the fall was so sharp and so sudden. Mercifully, after the bloodbath of June, the markets once again began their upward journey, and by last fortnight at the time of writing, the BSE's 30-share benchmark index was up 32 per cent. Holkar was relieved. But not for long. Reason? When he hunkered down to check the prices of the stocks he'd purchased, he realised they hadn't exactly kept pace with the Sensex uptrend. Hindalco was still almost 30 per cent off its peak price (the price at which Holkar had entered), Reliance Energy was off 28 per cent, and Ranbaxy 18 per cent. The Sensex may be up by a mile, but Holkar is still very much in the red.

Back To Winning Ways

Indeed, from the outside, the scenario appears buoyant: After crashing 30 per cent in mid-June, the Sensex would appear to be back to its winning ways. The revival seems to have trickled down through the market, what with the mid-cap and small-cap indices notching up 31 per cent gains since the June free fall. Every stock that constitutes the Sensex is up from its three-month low, with the it pack comprising Infosys Technologies and Satyam Computer Services registering a 40 per cent-plus appreciation in this period. What's more, Infosys and Satyam have run-up even higher than their mid-May prices, the period during which the BSE index hit its all time high of 12,671.

But as Holkar will testify, the teji isn't quite back, and there's little sign of celebration amongst the broker, investor and punter community on Dalal Street. Sure, a 3,000 point run-up in less than three months does suggest the glory days are back, but scratch the surface and you will discover the fallacious nature of the current boom: One, the rise is on the back of low volumes and turnover. Two, unlike in the December 2005-May period, when the Sensex shot up from 8,800 to 12,671 levels, the current gains aren't backed by convincing inflows from the FII fraternity. Third, the market breadth, of which the advance-decline ratio is one good indicator, is weak, making it difficult to vouch for the sustainability of the rally. Fourth, all the frontline Sensex stocks would appear to have participated in the recovery, but a comparison with previously-registered highs indicates that, other than just three to four stocks, the rest are still lagging the highs they notched when the 30-share index had skyrocketed to its lifetime high. And the final factor reinforcing that all's not well with the ongoing boom is that the primary market for initial public offerings (IPOs) just isn't rumbling in tandem with the secondary market (see IPO Blues...). Shrugs Ambareesh Baliga, Vice President, Karvy Stockbroking: "The lack of general participation-including that of the retail investor-is the key reason for the subdued feeling in the market. There are many investors who are still stuck with losses made during the fall." Agrees Andrew Holland, Head (Strategic Risk Group), DSP Merrill Lynch: "We have not witnessed any optimism in the market as people are still nursing their wounds following the sharp fall."

Swift Recovery

"The current advance-decline ratio indicates that the market is cautious" Gagan Banga Executive Director/Indiabulls	"A further rise in the market from here would be a cause for concern" Vaishali Nigam Sinha Executive VP Daiwa Securities SMBC

That may appear surprising considering the swiftness with which the "recovery" has taken place: The Sensex took just 56 sessions to rise from 8,800 to 11,700 levels. In comparison, between December 6 and April 18, when the BSE's benchmark travelled a similar distance, it took all of 90 sessions to get there. Yet, the speed of the rise itself could be one indicator about the unreliability of the current rally. Low volumes and turnover figures bolster that theory. From June 15, 2006, the day the Sensex rallied from its low of 8,800, till August 30, the Sensex stocks recorded average volumes of 1.97 crore shares. The corresponding figure during the previous boom between December 6 and May 11 is 2.40 crore shares (traded volumes were the highest during the crash between May and June, at 2.88 crore shares). The volumes of shares in which delivery was taken was higher too in the earlier bull run, at 99.5 lakh shares. That the current rally is more speculative in nature is evident from the comparatively lower delivery volumes, of just 61.7 lakh shares in the mid-June to end August period. The lack of trading interest is reflected in the derivates segment too. Average turnover in futures and options (F&O) has slipped from close to Rs 30,000 crore to Rs 22,220 crore.

Perhaps the best indicator of the dubious nature of the current spurt is the relative inactivity of foreign portfolio investors. When the Sensex rose by almost 4,000 points between December 2005 and May 2006, the northward move was spurred by a generous dose of FII investments-all of Rs 29,225 crore. In sharp contrast, the run-up from 8,800 levels of mid-June to close to 11,700 (3,000 points) has been on back of just Rs 5,445 crore of FII greenbacks. Of course, much of those recent inflows are in a handful of stocks, namely Infosys, Satyam, Reliance Industries and Bharti Airtel. Don't forget that just three stocks-Infosys, Satyam and Reliance Industries account for a little over one fourth (26.11 per cent) of the Sensex's weightage. Of the 30 Sensex stocks, 26 are still trading comfortably below their May 11 peaks. "Only the big boys like Infosys have contributed to the rise in the market, the rest are still lagging," says Baliga. Only three companies Infosys (11 per cent), Satyam (6.3 per cent) and Reliance Industries (2 per cent) are up above their previous all-time highs which were recorded when the Sensex scaled 12,671 in May. Hindalco Industries (down 29 per cent), Reliance Energy (down 28 per cent), Tata Steel (down 21 per cent), Ranbaxy (down 18 per cent) and Hero Honda (down 17.5 per cent) have the major losers among Sensex stocks, in comparison with their May 11 peaks.

All's Not Well In Mid-caps

Move away from Sensex and into the mid-caps-which is the hunting ground for most retail investors-and the scenario deteriorates further. As Karvy's Baliga explains: "Unlike the Sensex, the mid-cap index has not recovered." On the face of it, the 32 per cent gains of the mid-cap and small-cap indices since mid-June may compare well with the Sensex's 33 per cent upturn, but don't forget that the mid-cap and small-cap benchmarks also crashed more spectacularly than the Sensex. Between May 11 and June 14, when the Sensex lost 30.5 per cent; the smaller indices' losses were in the 40 per cent region (43 per cent for the small-cap index). Of the 303 stocks that constitute the mid-cap index, 287 are trading below their May 11 levels. Of these 287, 105 stocks are still trading 25 to 57 per cent lower than their May 11 quotes. Similarly of the 498 stocks traded on the small-cap index, 459 are trading lower than their closing prices on May 11, of which 240 are trading lower by 25 to 72 per cent.

Since last fortnight, one glimmer of hope has been an improvement in the ratio of advancing and declining stocks. For the entire month of August, the average advance-decline ratio on the BSE settled at 1:1. That's still no reason to bring out the champagne but the ratio looks better than 0.8:1.2 in July. Which means that although the markets were rising in July, the number of stocks falling was larger than those moving northward. "The advance-decline ratio indicates the underlying sentiment in the market. The current ratio indicates that the market is cautious," says Gagan Banga, Executive Director, Indiabulls.

Concerns Remain

"People are still nursing their wounds following the sharp fall" Andrew Holland Head (Strategic Risk Group) DSP Merrill Lynch

At the time of writing, the markets were showing little signs of cooling off, and every point gained is matched with an increasing level of nervousness. "A rise in the market from here would be a cause for concern, as valuations will once again be overstretched and will override fundamentals," points out Vaishali Nigam Sinha, Executive Vice President & India Head (Investment Banking), Daiwa Securities SMBC.

The picture is not totally gloomy, though. The report cards of corporate India for the first quarter have been impressive-sales are up 27 per cent and net profits up 34 per cent. But as long as the FIIs continue to remain lukewarm to Indian equity (see Is The FII Fury Finished?), and as long as retail investors continue to tread with trepidation, the markets will continue to look directionless. "Retail investors are responding slowly to good news. Until they come into the market, we are not going to see any major upward movement," says Manish Sonthalia, Vice President, Equity Strategy & Portfolio Manager, Motilal Oswal Securities. Baliga rules out a "panic fall", but senses a correction back to the 10,200-10,500 levels. Banga sees the Sensex moving in the 10,000-11,200 range. "As long as corporate India continues to deliver 15-16 per cent earnings growth, we don't see any major fall in the market. However, I don't see the market touching a new high and it's no longer a runaway market," he adds. The biggest bugbears of volatile crude oil prices and rising interest rates continue to spook investors. That's why Banga points out that the current run-up is "no more a secular bull run. Unlike the last three years, during which all sectors were re-rated, from now onwards it will be a stock pickers' market." For Holkar and his ilk, it will be some time before they are able to scent profits on the brave bets they made during the manic phase on Dalal Street.