Cover Story: The Coming Crash, Pg 2

When the Sensex bungee-jumps, even in reverse, the elasticity of the cord is always in question. Starting at 3,164.66 on January 29, 1998, it screamed up to 4,322 on April 22, 1998, a gain of 36 per cent in 83 days flat. But before the bulls could celebrate, back it plunged by 1,170 points, landing at 3,152 on June 15, 1998. Squeezing the same pattern into a single day, on June 10, the Sensex plummeted by 157 points in just 130 minutes of frenzied selling. These wild gyrations, coming in ever-succeeding waves, could only have ended in a crash.

The first support level could have come around the 3,165-mark, from which the last upward journey began. That gone, the Sensex cannot expect a prop till it reaches 2,713.12, the bottom that it scraped on December 6, 1996. Argues Mohoni: "The fact that the markets have taken a dip within two months of reaching a new high usually means that we could be heading for the continuation of a severe bear market."

True, recent history has seen the Sensex rally immediately after dropping below 3,000--almost willed on by the refusal of marketmen to let it stay below that psychological watershed for too long. Points out Manoj Murarka, 34, director, Batliwala & Karani: "A long-term breach of the 3,000-level needs a total reversal of economic trends. Only once has the Sensex stayed below the 3,000-level for a long time, and that was in 1993--the year in which corporate profits dropped by 21.70 per cent." Moreover, interest rates were at an incredibly high 19 per cent, and the aftershocks of the Great Indian Stockmarkets Scam were still being felt.

Will marketmen read into 1998-99 a repetition of those years of crushed profits? Bet on it, given the combination of a confused Budget 98, global sanctions, and the spectre of rising inflation. On the upswing, if there actually is one, the resistance is expected in a range between 3,425 and 3,500. But if it is unable to penetrate it, the Sensex could well obey the law of gravity again, heading below the January 15, 1998, low of 3,152. The best-case scenario sees it settling there. Not everyone thinks so, however. Predicts technical analyst Dharmesh Rajdev, 31, chief trader, Smifs Securities: "Going by the past, the Sensex is expected to touch the 2,925-3,000 band sooner than expected. In fact, it could go to 2,750."

Just how far down, then, is the Sensex likely to go before bottoming out? Analyses C.K. Narayan, 40, technical analysis consultant, Apple Financial Securities: "The culmination is likely in a range between 2,630 and 2,730." Adds the Mumbai-based chartist Mehmood Khan, 31, assistant manager, Times Guaranty: "Once the Sensex pierces the support level at 2,905, even the bottom of 2,713.12 will be challenged, and the new bottom may emerge only at 2,515." With a tough packet of sanctions and the spectre of near-complete FII withdrawal, marketmen don't even rule out a revisit of the January, 1992, low of 1,949.31.

MYTH
The FIIs' Withdrawal Is Behind The Crash Of '98

REALITY
It isn't just the foreign investors who are pulling out. So are local investors, desperate to protect their portfolios from further erosion in values. And the institutionalisation of the markets has ensured that every withdrawal has a major impact.

MYTH
The Indian Markets Have Only Caught The Asian Flu

REALITY
Falling stock prices and currency levels in the East Asian countries are not the root causes of the crash although they are an additional factor. Investors are selling because they have lost faith in the Indian economy of the near future.

MYTH
The Centre Will Intervene To Prevent A Real Crash

REALITY
Although the institutions may obey the Finance Ministry's orders to brace sagging stocks, their financial compulsions will prevent them from sustaining the support. Not even new policies to meet the market's expectations will help any more.

MYTH
The Revised Budget 98 Will Prop Up The Market

REALITY
The halving of the additional import tariff and the suspension of the new excise duties has only created confusion instead of hastening a recovery. With the only certainty of the changes being inflation, the markets are not reacting positively.

There's more room for gloom from the theory of selling, which says that the penetration of support levels sends the selling momentum into a higher plane, with even basement bargain-hunters refusing to take advantage of the falling prices to buy. For instance, as the Sensex started dipping from January, 1998, the FIIs' activities proved this very theory: from net purchases of Rs 739.60 crore in February, they progressively moved through net purchases of Rs 567.90 crore in March (down 23 per cent), and net sales of Rs 108.40 crore in April (down 119 per cent), to net sales of Rs 883.7 crore in May (down 715 per cent).

At best, the market can hope that, ultimately, there will be no more stocks left to dispose of in the sellers' portfolio, creating a vacuum from which a rally begins. A purely technical rally of 240, to 3,400, was noticed on June 17, 1998. However, no such recovery is either powerful or long-lived, suggest technical trends. Says U.R. Bhat, 42, cio, Jardine Fleming Asset Management: "I don't see the Sensex going up by, say, a thousand points since there is no trigger to move the market up. A range between 3,500 and 3,600 is the best you can expect." Before, that is, the string of the yo-yo starts unwinding again.

Even if it is the season of the bull in theory, the climate is different this year. As is the global trend, returns from the Indian stockmarkets too have been found to be linked to the time of the year. According to a study conducted by Rajendra Rane, 33, analyst, Prudential ICICI Asset Management, as part of his Ph.D thesis at the Indira Gandhi Institute of Development Research (IGIDR), the markets are at their lowest in May, climbing steadily to peak in September, before starting a fresh down-and-up cycle which reaches a high again in December.

Rane's explanation: in May and October, money flows out of the stockmarkets into other short-term investment avenues that offer higher returns. For one, it finances the needs of commodity traders who need large amounts of cash to buy harvested crops and give advances to farmers for the next season. Secondly, the onset of the summer and the festive season holidays increase individual demands for money. And, finally, companies as well as retailers increase production and inventory levels of consumer products in October, in particular, to prepare for the expected demand surges in autumn and winter--and, therefore, need short-term cash. The easing of such demands in June and December brings money back to the bourses, boosting stock prices.

Unfortunately for the bulls, some of these drivers of demand for money may be conspicuous by their absence in 1998. For instance, consumer spending is unlikely to rise as much as it normally does. And, sitting as they are on huge inventories, neither companies nor retailers will need additional money to fund production or purchases. So, not much money may be flowing out of the bourses to fuel these engines in any case--lowering the probability of resurgent prices afterwards. Today's bears are rampaging although no money is being pulled out for other investments, a classic warning of a collapse.

STOCKCAST-II: TARGET 2,852

The past holds the key to the present. In each of the past two years, the stockmarkets bottomed out in December and January, and pleateued between June and August. Interestingly, the rise or fall in all these cases was in units of 650 points. By that logic, another fall--of two such units--should take the Sensex down to 3,022. Or 1,300 points lower than 4,322. Says Dharmesh Rajdev, 31, chief trader, Smifs Securities: "The next stop downwards should be 34 per cent below the top, or, 2,852.52." A second trend capturing earlier movements predicts a similar bottom. At present, the 20-month moving average stands at 3,655.48, with a standard deviation of 358.26 points above it. Multiples of this standard deviation identify the different support bands, the next of which stands at 2,977.90. Thus, all indications point to a band of 2,900-3,000 for the Sensex--with the past suggesting that it will be sooner rather than later. The fall from the top: between 1,322 and 1,422 points.