Trading jargon can be both off-putting and sometimes, downright confusing. For example, markets are sometimes described as "over-sold". A bearish session is often called an "all-sellers" session. In the literal sense, a market can never be "oversold" or "all sellers". There must always be a counter-party buying for any sale.
In terms of jargon, the meaning is clear enough. An "all sellers" is a session where the bears have been much in evidence and supply or offers have been thick and fast onscreen while the bids have been few.
When supply exceeds demand in a liquid market, prices drop until demand matches supply. Equilibrium is never reached smoothly - it is overshot until the market is oversold and demand exceeds supply, at least temporarily. As a result, prices spike up sharply.
This happens on a continuous basis in stock markets along with the opposite overbought situation. When enough stocks are oversold enough, there is a bear market rally. If there is enough demand, there can even be a major trend reversal.
I think we are set for one of those key points next week and the trigger could be the government's winning a vote of confidence if it does manage this feat. Disclosure: I have no idea if the UPA will pull through on July 22 and no inside information on the horse-trading to suggest that it indeed will pull through.
I do know that there is a lot of smart money on the short side betting on the assumption that the government will fall. Hence if the UPA does come through, the market will be oversold and rebound fairly sharply I think.
In the past six months, after making record highs in January the market has dropped over 35 per cent. Nobody can say with any certainty where it will go in the next six months. The overwhelming consensus is down, If one looks at option chains and premiums, there is a fair idea of market expectations. In the July settlement itself, the options market has heavy open interest in the Nifty 3600-put and 3700p - breakeven on those contracts will come roughly between 3550-3650.
Around 20 per cent of all open index contracts are in the December 2008 settlement and any option-trader (buyer or writer) with that long-term a perspective has to be a very serious player. Adjusting for premiums, the lowest breakevens on those contracts (mainly the Nifty 5000p which is deeply in the money and also the Nifty 3600p, 3700p and 3800p) are around 3350. If we take a weighted average of all outstanding Nifty puts, the breakevens are around 3700.
So let's say, the pessimistic limit of market expectations are roughly in the 3300 range on a 6-month basis and about 3500 on a 2-week basis. The average expectation is about 3700. These expectations are quite likely to be fulfilled if the UPA falls on Tuesday.
But this pricing has political chaos built into it. If the UPA holds up, there could be a panic reaction from bears and that would be a driver for price recovery. In that case, we could see a dead-cat rally that pushes prices up 10 per cent or slightly more.
The UPA will be out soon enough anyway. There is one factor that many people are underestimating - its need to raise money. The UPA cannot win the vote of confidence without making many fungible promises. It will also be in election mode and elections require funding.
The easiest way to achieve financial closure for the election war-chest is to hand out favours, clear pending contracts and tenders, and pass policy legislation. The Left is no longer there as an inhibitor to such deals. You may see quite a lot of action, in the next few months, assuming the UPA buys time on July 22 to make an orderly withdrawal. In a market starved for good news, that could a big trigger.
No I don't expect this to turn into a bull market by December this year. The macro-economic fundamentals are too weak for it. But there could be less downside that people fear. And the next few weeks could be much better than the consensus expectations.
