A roller-coaster ride on Dalal Street

The life of the Indian stock market investor is getting tougher by the day. The market is playing up to the tune of events of which he has little or no clue. He/she is totally unsure if a day of exuberance when the index climbs to a dizzying height may be followed by a sudden freefall that wipes off a substantial part of the value of his portfolio.

It's not that investors are unaccustomed to wild fluctuations. But the suddenness of last week's market mayhem, sparked off by the subprime mortgage market crisis in the United States, has sent a chill down their spines.

The liquidity crunch was caused due to defaults arising out of loans granted to customers with low creditworthiness and history of defaults.

The ups and downs

Sensex, the 30-share benchmark index of Bombay Stock Exchange, soared by 375 points on Wednesday after the Federal Reserve kept interest rates steady and forecast a positive outlook for the United States economy. But the euphoria was short-lived.

The following day the US markets slipped into the red after BNP Paribas pressed the panic button, the European banks refused to lend to each other and the Federal Reserve and the European Central Bank had to pump in billions of dollars to fill a sudden liquidity shortage created by an enormous demand for cash from banks hit by the subprime mortgage collapse. The Sensex plunged from the day's high of 15,542.40 to close at 15,100.15, down over 207 points or 1.4 per cent over the previous close. The investor on Dalal Street was left totally confused and hapless. He did not know where to look for a ray of hope.

The questions in the investor's mind were: How long will the global bear-hug continue? Is it time to exit and stop thinking about stocks for a while? The answer to all these questions: Stay on.

A very large section of the market participants, including foreign institutional investors (FIIs), are driven by sentiments and not by fundamental triggers. No sooner the mortgage crisis showed up, they exited the market. But no crisis in the world is permanent.

The central banks across the world are doing their best to pull the lending institutions ashore. And once the crisis is over (sooner or later), the US and other global markets will start rebounding. The foreign institutional investors will return again to Dalal Street. So why worry?

The short-term investors seem more perturbed. But this is not the time to panic. During the build-up to the subprime crisis, the Sensex was beating its own records every other day.

That means the values of their portfolios were at new highs. So even when the crisis hit and the Sensex took a battering, the investors had enough profit-cushion to protect them from being injured after the freefall.

Unlikely scenario

But if everybody decides to sit back, the trading volume in the market will decline and the index will fall further. That is most unlikely to happen. The lead will necessarily be taken by the FIIs. Once they come back, the market will show some momentum and volumes will return.

The best way to remain engaged in the market thereafter is to adhere to the buy/sell dictat, meaning, if the trend is down, sell and if the trend is up, buy.

It's time to look at the crash as an opportunity too. With stock prices plunging, the investor must pick up some good buys. Again one must remember to buy when stocks are on their way up and not vice-versa.

Every stock market player must remember that the ride on Dalal Street is on a roller-coaster and not on a Rolls-Royce. Crises are bound to occur, but the solutions also lie somewhere there.