CORRECTION & CAUTION

It has been a volatile week in stock market worldover. Even though markets were scaling new highs regularly, over the past 3-4 months enough indications were there to suggest that the rise is purely driven by liquidity and valuations are getting streched particularly in construction and infrastructure sectors. Everytime when market corrects we try to find or attach a reason for it - be it yen carry trade, be it Chinese market controls and now the sub-prime mortgage loans and housing loans failing in U.S. For the past 18 months U.S housing market is in all sort of problems with supply outstripping demand. Now with raising interest rates the loans which have to be rolled over in this quarter alone stands at 250 billion dollars. So with higher EMIs more foreclosures and defaults leading to more supply of houses for sale. On the other hand it will also reduce the new houses under construction or to be constructed leading to loss of jobs, idle investments leading to more corporate losses. So a vicious circle is on and will only gather momentum as we progress.

How far this will affect Global liquidity and moneyflows to emerging markets like India is to be seen over the next 4 to 6 weeks. Until then it is better to wait & watch instead of buying now thinking it is cheaper by 3-5 from the top.

As for as Indian market index SENSEX goes, we have just started the 1st phase of correction after touching an all time high of 15868, and I feel the correction can easily take it upto 14200 levels. My advice is to use any rally to sell & book profits and stay on cash for atleast 4-6 weeks
All the best.