Who's One Up On D-Street?

If the sovereign wealth funds continue press sales, domestic investors continue to make some purchases at lower levels. Stocks prices are at discounted levels, but foreign investors are selling because oil prices took another dip to the $30 levels. Domestic bulls are trying to drive markets higher by buying the dips. The market is ranging between levels of 7300-7500 for the past few weeks. Who has the upper hand now?

If this market is making one jittery, it's quite natural. Markets are exhibiting some sharp movements in both the directions - up and down. On some days, there is heavy selling, and on other days, buying on the dips is the mantra.

While foreign investors are pressing sales, their realisations are getting squeezed. Selling at subsequent lower level fetches lesser dollars for the same amount of shares. In other words, existing investors have to dump larger quantities to retrieve the same dollar.

As prices dip even lower, foreign investors have to sell more quantities, till investors have cleaned up their portfolios or the last few pieces are just not worth selling. The Indian markets are reaching this point now.

Consider the BSE Bankex which lost 20 percent this year, and 26 percent from its peak made in January 2015. PSU and some private sector bank stocks have been hammered black and blue due to rising delinquencies. Stock prices of some frontline banks are selling at offseason rates. Look at it another way, prices don't have much scope for a fall during an off-season discount, do they?

The question is, is the selling over? The fact is that investors really don't know what foreign investors are likely to do in the next few months. Will they increase the selling or reduce the intensity? What are their purchase prices and what is the kind of loss they are willing to take? If you knew all these answers, may be you would be better at timing the market. It's a lot like knowing the cards your opponents have at a poker game.

The stock market game is similar. Hence, if investors have disposable cash - and some patience - these are some of the good times to enter the market for the long run because prices are low. This market is at historical average valuations, trading at 15.7 times forward earnings.

An appetite for stocks is visible at the ground level. The recent IPO of Teamlease Services received an overwhelming response from domestic investors. Elsewhere in the market, companies reporting some good numbers are seeing a lift in their stock prices. Investors are continuing to discern the good quality stocks from the also-ran ones. Investors are getting better at screening the good companies where cash profits are increasing.

While the markets may remain volatile and range bound due to global choppiness, chances are there will be some buying at lower levels due to short-covering, and this pre-budget market rally may find some renewed legs, led by banking stocks. This sector has some heavy weights in the bellwether indices.

Err on the side of caution in mid-caps. Their valuations are at a premium to large-caps. Small investors mostly dabble in mid- and small-caps. While it's true some mid-caps can turn large-caps, it's also a segment that gets slammed heavily and can be painful in a downturn. When there is red ink splattered in these stocks, small investors are quite likely to reduce the intensity of their purchases.

If you have some spare long-term cash, better to look at beaten down large company stocks for the long haul. Buy the dips is the mantra, if you are a long-term investor. Sell the rallies, if you are a trader. The bulls are trying their best to pull off a rally, but bears are selling - and there's quite a battle brewing.