Why are Indian markets reversing?

Yesterday, the markets turned down suddenly. It was a usual morning with both the midcaps and smallcaps doing pretty well as they did over the last few days. Infact, they were doing better than large caps. But suddenly there was a reversal. Reasons I could garner are these:

ONE: There was a rumor of a clandestine Fed Meeting scheduled for yesterday evening. In that meeting, the fed was expected to cut interest rates. Why would Fed in its sane do that? when the FOMC meeting is just three weeks away on 11th Dec. The markets were not so bad for a quick intervention like they did in August. Infact, no one is even talking about the gumming of commercial paper. When Fed had made it clear that they were giving 'additional insurance' on 31st Oct but cutting rates by 25 bps, why would they give additional 'additional insurance' again? Or is it that somebody mis-understood the release of minutes of meeting of last FOMC as a secret meeting and smsed everyone that led to the chaos. This, I hear, has spread to the European markets as well. I cannot figure out why this happened and would leave it for the wisdom of the market.

TWO: There is a talk that some brokers have decided to short the market (as a cartel). I undertand that there was profit looking going on in the market market due to impending negative global cues and no real triggers to watch out for. But this theory of a broker cartel deciding in which way to turn the markets is scary. If it is real, they could do it any time with any stock. So, this could just be a baloney.

THREE: The FII figures indicate huge selling of over Rs 4200 crores in F&O. Some say that it was the hedge funds that could have wound up their positions. This is not a surprise as they guys have been selling equities, commodities and currencies across the globe. Look at how Yen breached 110 mark due to yen carry trade. Apparently, the investors met their profit target and want to get away from risky assets. I am surprised to see no one talking about the redemption numbers for this quarter of hedge funds. If they are under pressure to redeem, they certainly would have booked their profit. Nevertheless, the argument about FIIs protecting their profits has some merit.

FOUR: The next argument I hear is that the Indian markets have run up steeply. The argument further goes to mention that every T,D & H is making money in mid and small caps which is a clear sign of complacency. Well, this might have some merit. However, the other Asian markets have also fallen steeply. Infact, India has so far outperformed other Asian markets (thanks to PNotes). We outperformed Hang Seng by 10% in the recent past. So, the selling is not only in India but all across.

Whatever may be the reason, the global clues are weak and there are no event triggers on the horizon. Some bloodshed would happen as it happened today with Sensex losing more than 600 points (third largest point loss) and Nifty losing more than 200 points.

Investors who entered recently could get out and enter at low levels. I hope they are in good quality stocks. Those who are sitting on cash could wait a bit to reenter. This market will give an opportunity to nibble which has been the best strategy over the last couple of years. Those sitting on good amount of profits may hit the beaches of Goa to celebrate festivities.

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