Stocks: Truth, lies and tickertape

The Sensex''s march in 2
13 April 2006

(This article was written when the Sensex was hovering over the 11800 levels)

Not since the heady, frothy times of the technology bubble have we witnessed a rally that's been as strong, intoxicating and seemingly endless. Comparisons tend to be odious but it is difficult not to miss some striking similarities between this one and rallies of the past two decades. It can be argued that since human beings and their natural traits don't change over centuries, their responses to similar stimuli remains largely unchanged over different time periods.

Like a rushing river in all its flowing fury, this rally too unfolds inexorably and will flow out to its ultimate destination. Trouble is that when you are located at any point other than the mouth or its delta, it is impossible to tell how much further it will flow, what terrain it will encounter along its path and when it will be a spent force.

It also begets a whole set of questions about its sustenance, whether it will dry up soon, or will it meander and flow slowly or will there be tempestuous currents, floods, riptides before it calms down. There will never really be any clear answers to nature's amazing work. The Sensex's rally so far resembles that river we are talking about. It's in full flow, brushing aside anything that comes in its wake, its intent crystal clear, its source and sustenance, seemingly perennial like a glacier.

The Sensex's march in 2006 has been staggering to say the least. It has brushed past 1000-point milestones with such nonchalance that most of us are humbled by its sheer ferocity.

The Bi-polar market
But lets for the moment analyse the benchmark indices' tryst with the headlines and what the undercurrent betrays. What we indeed find is that until a week ago, while the Sensex and Nifty rallied forth, large swathes of the market (including several large cap non-index stocks, mid-caps and small-caps) bit the dust. The number of stocks hitting new highs now, is distinctly less than the number that did so in the October-December 2005 quarter when a broader market rally was in full flight. The volumes traded today have expanded only in March and, in fact, declined between August 2005 and February 2006 even as the market rallied.

To buy the fad, sell a stock
It clearly shows a market where opinion and risk appetite has become sharply polarised in what is beginning to look like a cyclical behavioral pattern. So while we had the whole world wooing and singing paeans about mid-caps and their high growth in mid and late 2005, it's suddenly the large-caps, which are now being fancied for obvious reasons of size leadership and liquidity attributes. Obviously the crowd is right only some of the time.