The Proverbial Eskimo

Current position in my trading book is short on both the STT (Short Term Trade)and LTT (Long Term Trade). Nifty fell today even as RBI raised repo and reverse repo rates by just 25 bps. Clearly the situation in the Eurozone has impacted the Indian markets too. Euro fell sharply against the Dollar on Wednesday and again on Thursday. Despite this fall in the Euro and the fears of a worsening debt crisis, the Nifty has refused to fall big.

This makes me wonder about the possible reasons for this incredible resilience of the equity markets in general and Nifty in particular. One could be that India is an incredibly attractive market with strong possibilities of an upgrade in earnings growth, with an already peaked/peaking inflation, a government that is functioning well, which has delivered on the expectations of the market that caused it to rejoice on the UPAs resounding victory in the April 2009 elections with an unprecedented 20% single day rally in the benchmark index and which is on the verge of beating those expectations with some even more big ticket reforms. Two, India is different and the entire world has the time to ignore the problems at home and somehow find the time to invest here despite the policy paralysis. Three, investors across the world are paid just to invest in India irrespective of the returns it generates because investing in India is so incredibly sexy. Four, investors across the world invest in India just to have an excuse to visit our great country. I could go on with even more reasons but if you believe any of them then you are a prime candidate to be the proverbial eskimo who can be sold a refrigerator.

Since none of us are that gullible we will have to find some other plausible sounding reason. Notice I did not say that the reason has to be the right one. I just said that the reason has to plausible enough. So here is a probable one. Maybe the situation across the world is so bad that investors are reasonably certain that the scenario cannot be allowed to play itself out. May be investors are betting that since non intervention by the government can lead to a financial disaster, governments are bound to intervene and if this is true then why sell even now? If things were not so bad then may be investors would have sold. I am not saying that this is the reason for the resilience but that this is one of the more probable ones. Investors have just got used to governments providing a backstop when things go horribly wrong.

Despite knowing all the probable reasons for the resilience in the market, I am short the Nifty since I am a slave to my trading system. I will remain short on STT until 5460 is crossed and will remain short on LTT until 5610 is crossed.                                                                            

Current Position:   STT Short   LTT Short                                        

Probable trades:   STT Cut short positions and go long > 5460 (2/3 weight)                         

                           LTT Cut short positions and go long > 5610 (1/3 weight)