Is the BIG correction over?

A correction is nothing more than a Wall Street euphemism for losing a lot of money very rapidly. While it is valuable to debate why it happ...

A correction is nothing more than a Wall Street euphemism for losing a lot of money very rapidly. While it is valuable to debate why it happens, I think the most important thing to remember is that it is normal. That8217;s right, normal.
8212; Peter Lynch, legendary fund manager

Is the correction over? This is the big question on Dalal Street these days. The 500-point plus fall in the benchmark Sensex from the 6,800 level in the last two weeks has made investors cautious, or put simply, showed them the reality of volatile markets. The reality is this: though the markets can make you rich very quickly, as they have in the last three months, they have the ability to suck back the wealth, like a receding tsunami wave, just as quickly.

The question being asked today is this: is this a good time to catch the market or should one wait for the correction to deepen? Technical analysts put Nifty at 1,900 as a very strong psychological barrier to the market and till the beginning of last week feared that if the market dipped below that, we were in store for a longish bear phase technically. But the market has pulled back from the brink though the volatility is still there. 8220;Corrections will continue. But there is more supply coming now. The market has gone up but there will be some news some day that can bring the market down. So correction is a continuous phenomenon now,8221; said Pashupati Advani, Director, Advani Share Brokers.

Budget: positive or negative trigger?
Will the Union Budget in February prove to be an immediate trigger for another upward movement or will it lead to a downswing? 8220;The market will remain volatile. But at least till the budget, the market will have an upward trend,8221; said Nandan Chakraborty, head of research, Enam Financial. And after the Budget a crash? Much will depend on the Budget proposals. Going by the promises of the UPA government and the track-record of Finance Minister P Chidambaram, the Budget may bring some cheer to the market. Moreover, factors like attractive valuations, consistent growth, outsourcing, growing domestic consumption and infrastructure investment _ which were driving the market in the last six months _are still influencing the market. But there8217;s considerable concern over foreign fund inflows. Will FII flows remain strong? After putting over 8.5 billion in 2004, there are fears that FIIs will retain their funds in the US and other developed markets following the rise in interest rates. FIIs will remain a large fear factor for the Indian markets till the Indian inflows broaden and deepen and we are able to attract more sticky foreign funds like the pension money that is less volatile than hedge funds.

Living with volatility
Given the market situation today, no retail investor can remain safe with his short-term investment in a volatile market. Fund managers recommend that investors should have at least a two-year horizon to ride over the volatility. Take, for example, the Sensex level in the beginning of 2004. It was around 6,000 but fell to around 4,500 levels in May following election uncertainties. The index recovered and closed the year 2004 above the 6,000 level with a 10 per cent year-on-year gain. If Sensex makes a gain of another 10-12 per cent _ 625-700 points _ in the current year, it will touch the 7,000 level. But this journey will be bumpy and if you don8217;t like rough rides. Stick to safer investing vehicles like bonds or government paper.

But remember that it is equity that finally gives returns that build wealth. And India has hundreds of undervalued small-cap companies with a good potential to appreciate in the coming months. If you8217;re a long-term investor, you will remain a winner.

With inputs from Arundhati Bakshi-Dighe