Those who follow the developments on the stock market would agree that not every stock price movement is linked to the fundamentals of a company. There are many other factors like global and domestic economic and political developments, private agreements, third party assessments, and above all, market sentiment that affect the stock price movements. It is these factors that are a trader’s delight.
The investor community at large especially the retail investors have a propensity to be influenced by what the big players are doing or, by what the media feeds them. Not many people scratch the surface to see what lies underneath.
Some recent stock price movements are a testimony to the fact that the concept of herd instinct is applicable here as well. When the government announced fuel price deregulation on June 25, 2010, the media went abuzz with reports of how fuel prices would go up and lead to inflation at the cost of protecting the oil companies. This was enough fodder for the sudden rise in stock prices of these companies. Public sector oil stocks soared more than 20 percent to their previous month’s lows. However, this sudden rise of interest in oil stocks is not completely justifiable. Only petrol prices have been freed and that too with a caveat that the government would intervene suitably in case of a high rise and volatility in international crude prices. Terms like ‘suitably’, ‘high rise’ and ‘volatility’ have not been defined. Moreover, it should be noted that petrol constitutes just 10 percent of oil companies’ sales. Diesel prices may be deregulated but, no time frame has been defined.
The prices of cooking gas and kerosene known as the “poor man’s fuel” will remain state subsidised. Above all, the fundamentals of the oil companies remain the same. Freeing up of petrol prices would not improve the bottomline of the companies but, only improve their cash flow. The latter is because earlier, underrecoveries of the Oil Marketing Companies (OMCs) were compensated by the government or, upstream oil companies on a quarterly or, yearly basis, as result of which the OMCs had to borrow money at high interest rates. Now, this would not be the case, thereby improving their day-to-day cash flow position.
Way back in 2005 when the Ambani brothers parted ways, investors were a worried lot. However, when in May 2010 they scrapped the non-compete agreement and decided to burry all their differences, all the Reliance stocks especially those of the ADAG group went soaring. Reliance Communications stocks gained over 35 percent as compared to their previous month lows. That the company belonged to the Telecom sector that was rated as an underweight sector, suddenly became irrelevant. Reliance Power and Reliance Industries too rose 7 to 9 percent as a result. There is no doubt that if two warring corporate honchos join hands, it is beneficial to both the parties. But a rise of over 35 percent is not completely explicable.
Many times, political developments too have a bearing on the stock market. And, when the political leaders think aloud, it makes a good trading opportunity. Recently, Agriculture Minister Sharad Pawar announced that the government may think of deregulation of the sugar industry. As a result, sugar stocks rose by 15 percent immediately. It did not matter that the issue has been discussed earlier as well or, the fact that all that the minister was doing was thinking aloud. He is yet to discuss the modalities with the government. But, the market sentiment improved. It would be no surprise if the minister goes back on his plans but, such temporary movements in stocks are a welcome respite for traders.
For many months now, telecom stocks have been out of favour by the trading community. Pressure on the price margins, increasing competition, uncertain regulatory environment, etc have led to the sector being rated as an underperformer. Most of the telecom stocks were at their all time lows until recently. Then came the Credit Suisse report on July 9, 2010 that upgraded the telecom stocks like Bharti Airtel, Idea Cellular and Reliance Communications. As a result, stocks rose upwards of 10 percent immediately. What happened to the margin pressures? What happened to the uncertainty over the TRAI recommendations?
Factors discussed above should not be a cause of worry for long-term investors. It is the short-term investors, or swing traders, who need to keep an eye on such developments. Even though such sudden sharp stock movements may not seem logical to fundamental analysts, the trading community loves them. Such short-term volatility gives them an opportunity to make quick bucks before the market corrects itself. Thus, as long as there are people who will give knee-jerk reactions to what the media headlines say, there will be traders smiling looking at their bank balances increase.