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    FAQs: Nifty, Sensex rebound; should you buy now and other questions answered

    FAQs: Nifty, Sensex rebound; should you buy now and other questions answered

    FAQs: Nifty, Sensex rebound; should you buy now and other questions answered
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    By CNBCTV18.com  IST (Updated)

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    Share market staged a recovery Tuesday, with Sensex rising as much as 1,000 points from the day's lows to close over half a percent higher. Midcaps and smallcaps outperformed Sensex and Nifty and closed over 1 percent higher. Why did the market rally today and is this rally sustainable? CNBCTV18.com tries to answer some of the questions uppermost in the mind of investors.

    Equity benchmarks snapped a six-day losing streak Tuesday, helped by a late rally in the US equities Monday. Investor sentiment, however, remains edgy ahead of the US Federal Reserve meeting Wednesday, where the central bank is likely to hint at the road map for hiking interest rates through the year.
    CNBCTV18.com tries to answer some of the questions uppermost in the mind of investors.
    Why did the market rebound today? Can this sustain?
    Today’s rebound in benchmark indices could have more to do with what is known in the market as a ‘relief rally.’ When share prices fall many days in a row, they are likely to rebound for two reasons. One is buying from investors and traders who may have sold at higher levels, and the second is buying from investors who feel prices have become attractive after a steep fall.
    It is too early to say if the rebound can sustain, given that there are some negative triggers ahead in the short term.
    Is the market close to making a bottom?
    Again, hard to say. Sentiment has taken a knock over the last week, which could trigger fresh selling at the slightest sign of weakness in the market. A couple of months back, it was a ‘buy-on-dips’ market. Suddenly, it has become a ‘sell-on-rise’ market, as investors try to make some money off the table while they can.
    Why are investors jittery?
    The primary cause of concern is the US Fed getting ready to signal higher interest rates as it battles raging inflation in the home economy.
    Why does that matter?
    An immediate effect is in the rise in US Treasury bond yields. It causes global investors to shift a part of their cash into those bonds. Those purchases are usually funded by pulling out money from so-called ‘risk’ assets such as equities, commodities and, to a lesser extent, corporate bonds.
    So investors are selling equities and buying US bonds?
    Not exactly. Multiple factors are at play here. When the US Fed raises rates, other central banks are also forced to raise rates to retain the attractiveness of their country’s debt.
    Most importantly, rising interest rates hurt corporate margins in the short term and dampen consumer sentiment, resulting in lower spending.
    Because of the near one-way rally since March 2020, share prices had gotten expensive. The rally was triggered at first by a sudden rush of money and then supported by a rise in earnings as economic activity started picking up. But with profits set to shrink, investors are wondering if the shares should be priced so high.
    What about Indian equities?
    Most foreign fund houses see Indian equities as expensive compared to their Asian counterparts. That could limit inflows into India till the time foreign investors get comfortable with the valuations.
    Does that mean the stock market is set to crash further?
    Not necessarily. But much will depend on the trends in global markets. What is certain is that stocks quoting at absurd valuations—such as the vaunted ‘new age’ tech startups—could continue to get pummeled for some more time as investors shift money into defensive stocks as well those which look more attractive in terms of earnings potential.
    How much have FIIs sold far?
    A little over Rs 11,000 crore so far in January alone and close to Rs 9000 crore in December.
    But isn’t domestic liquidity strong enough to offset it?
    For now, yes. Monthly inflows into mutual funds through SIPs are over Rs 10,000 crore. But remember, if foreign funds continue to sell at this pace, it is a matter of time before domestic liquidity dries up.
    Not so much the money coming in through SIPs, but definitely, the money being directly invested by high net worth individuals and retail investors. Domestic inflows are a function of stock prices. If stock prices fall, investors will not be as enthusiastic about investing.
    What about leveraged positions in the market?
    The recently introduced SEBI rule requiring brokers to collect the entire margin amount upfront from their retail clients has to an extent reduced the selling triggered by an inability to meet margin obligations.
    In the past, brokers would fund their clients’ margin obligations and allow them to over trade. That is no longer the case. Retail clients can now only trade to the extent of the margin they are able to deposit with their brokers.
    What about the positions in the F&O market?
    Retail exposure to stock and index futures has reduced over the last couple of years because of SEBI’s decision to increase the minimum lot size. That has made it expensive for retail investors to trade in futures.
    However, retail investor participation in stock and index options has considerably risen in the last couple of years. Compared to futures trading, the risk to the system from a build-up in options contracts is much lower. But the investors can suffer heavy losses in the event of a sharp adverse move in prices, and this can affect domestic liquidity.
    What about IPOs?
    Reasonably priced IPOs will find takers in any market. But the days of any random company being able to ask for obscene valuations and get it are behind. Many companies will be deferring their IPOs, hoping to get a better price later when the market stabilises.
    What should a retail investor do?
    If you have mutual fund SIPs running, do not discontinue them. If you are a direct investor in stocks, use every rally to sell stocks that were more a flavour of the season and not backed by fundamentals. As for fundamentally sound stocks, wait for a while before you start looking to add to existing positions.
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