What If : An Outline of A Conspiracy Theory



What if somebody knew the exit polls results in advance, and they did predict a clear majority for the Congress? But this somebody ‘prevailed’ upon the polling agencies to build on the consensus that the UPA was headed towards 200 seats. Or the polling agencies weren’t that smart and did not see such a huge surprise coming. Market

Declaimer: This article written was originally in May 2009 and some of the data points may be outdated.

Sophisticated investors know that every time the “uncertainty quotient” in the markets goes up, there is a dip on a minor sell-off as the market waits for the uncertainty to clear. That is when ‘intelligent’ investors chip in, buying and holding to wait out the uncertainty. This is where the HNI traders make a lot of money, always trading against the market, banking on a reversal as fundamentals work themselves out.

So maybe, as the consensus built up that the UPA was going to get 216 seats, HNIs went short on the market, betting that the increased uncertainty (over Govt formation) would lead to a correction in the Sensex. And on the other side, a bull cartel developed, which had information that there was a surprise awaiting….

That is why the Sensex treaded water through the uncertainty, which should have given the bears the smell of a typhoon developing. But they didn’t run, and their selling was absorbed in higher levels by the bull cartel….

And then…..mayhem!!! The worst stocks, the most unlikely risers, hit the roof. They were all on the Sensex, which shot the market through the roof, led by exactly those stocks which were fundamentally the weakest, and which ‘intelligent’ HNIs would have shorted.

Real estate, banking, infra….the old suspects. What is it about these discredited stocks that suddenly excite the market, after their current reality and prospects are well-known? Not HUL, ITC, or whatnot. They called it “satta plans” in the days of Harshad Mehta.

How do we know whether my theory is true? Well, if it explains the subsequent facts. Watch out now, for a return to reality. A slow dying out of the rally, a sell-off on some minor pretext. The money made by the bull cartel will now be deployed in the actual mid-caps which have superior fundamentals. The market will fall, at least the broader mainstream Indices, but the beta of certain stocks will not track that of the market. The “Beta Divergence” will expand with a broader range, including some negative betas (i.e. some stocks will be flat or rising even as the broader market is falling).

I hate putting numbers to my forecasts, but maybe the market might retrace the entire recent rise or at least 70%. My surmise: there are no genuine buyers in this rally. Nobody bought Infosys in 1800, just after they had put out such a dim prognosis. Only the shorts were covering; as their demand fizzles out, Infosys will limp back (as it already is). The same for DLF, Unitech, and ICICI.

Yes, the action will shift to mid-caps with real stories. The net result: you will have a stock-specific market, but the broader indices will remain in a range-bound band. “Intelligent” HNIs will get rich if they get their specific stocks right, but a broad liquidity-driven rally is unlikely in the short run.

Still, I remain bullish. There is always the possibility that FIIs will allocate more money to India than is necessary, creating liquidity and momentum. But that will increase volatility, and you have to get that right.

All in all, it will remain a trader’s market, the profits going to the person who sells correctly. Buying will be rewarded at all levels, provided you have staying power.



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