Cautious but few willing to go short before Budget

At least seven out of 10 people on Dalal Street are bearish/neutral on the market. The general perception is that valuations have become
pricey, and those with high expectations from the Budget will be in for a major disappointment. And though bears clearly outnumber bulls at this stage, a steep correction in stock prices before Budget seems unlikely, say market watchers. That is because bears are unwilling to back their words with actions this time around, having suffered heavy losses in the week, following the election results.

An immediate fallout of this approach is that bulls are finding it difficult to rollover their long positions in the futures segment, to the July series. In a rollover, traders square-off their current month positions, and take up an equivalent position in the next month series. "Liquidity is tight in the July series (of futures); clearly there aren't enough traders willing to go short on the market," said a dealer at an institutional brokerage.

In the run-up to the elections, most traders had sold short in anticipation of a hung Parliament. Their bet was that stock prices would crash after the election results were announced, allowing them to make a neat profit by buying back their positions at lower levels. But with the verdict clearly in favour of the UPA, markets surged in the following weeks. Bears suffered bruising losses, as they were forced to cover their positions at prices way above they had sold at.

"Bears are very cautious this time after last month's experience," says Birla Sunlife Insurance chief investment officer Vikram Kotak. Mr Kotak expects the market to find support in the 12000-13000 band, but does not expect it to cross 16000 anytime soon.

Brokers said some of the leading market operators have unwound their long positions over the past one week, but are not going short on the market. And it is not just traders who are treading carefully. Brokers say fund managers too are wary of booking profits before the Budget, unless a stock is hopelessly overpriced.

Most fund houses had to book profits in the run-up to the election results, and ended up severely underperforming their benchmark indices when share prices soared later. But while they are not selling actively, they are not loading up on shares either because of concerns over valuations. "Rising momentum has been picking up since the May 18 general election, but we think the recent high marks the entry of the index into a near-term peak zone. We think the near-term rising wave will hit a wall at 15830 or at 16620 at best, and the transition to a correction phase will take place again through July-August or November," says a note by brokerage house Citi.