Terror Attacks ... markets have become resilient

The frequency and intensity of terror attacks have been going up over the years and in some way markets are developing an immunity to these events. The negative effect, if any, will not last long. What's more important is the effect the terror that is in the minds of the financial markets from the past few months. And the culprits of those events are in that sense much bigger terrorists!! They have caused much bigger damage, including destroying lives of several innocent people.

The last few days have seen continuation of announcements of steps to arrest the financial meltdown. China announced a steep interest rate cut in a bid to arrest the slowdown. European Union announced a $260 billion stimulus package to boost the economy. As we said earlier, the size of these bailouts only indicates the extent of damage that is being created. Just a while ago all the government were concerned about rapidly rising commodity prices and now they are worried about deflation. The shift has happened in just a few months - most commodities peaked in July 2008 - just four months back!!!

A look at this table will tell how some of the big Indian companies have lost in just two to three months. Tata Steel lost more than 70% in just two months, when the indicies hit a low on 27th October this year. Most of these stocks haven't recovered since then.

We expect the bailout packages to push up commodity prices a bit, which can push up these commodity stocks. And having lost as much as they have done in such a short time, the stocks may see a decent bear market rally, which can push the indices by as much as 15-20% in the next month or two.

We think the market has seen an intermediate bottom for the time being and new lows are unlikely for the moment. The markets may move sideways and move up gradually though it is unlikely to gain in confidence. The next turnaround date is likely to be around 10th January 2009. A fresh fall may start around that date till then it is going to be all right.

The risk of going long remains high. Avoid shorts for the time being. Look for shorting opportunities at higher levels.

Vivek Bhargava