Speculative Bubbles

  Why Asset Price Booms are Bad ?

The Indian stock market investors are supposed to be enjoying one of the best stock rallies for the past two and a half years. The current stock rally had it's origins in the month of  March 2008. The major market indices, S&P CNX Nifty and BSE  Sensex recorded new all time closing highs in the first half of November 2010. However, a cursory look at the stock charts of some popular shares from the Nifty index selected randomly show a very different picture. It is seen that these darlings of the 2008 boom have not done anything in the recent rally to justify the investor's faith in them. Let's examine the charts of  these randomly selected  Nifty companies to see whether any similar patterns can be seen. The period of these charts starts from July 2007 and ends  as on 26th November 2010 covering the peak of  the previous boom and the recovery so far.

RCOM - Weekly Chart July 2007 - Nov 2010

Update for 26th November 2010

 Scam and the Derivative Expiry Lead to Another Sell Off !!!

In the last update for the just ended trading day, based on the then positive overseas cues and the option open interest positions, we had indicated that Nifty future may try to trade towards the 5900 strike and close near or around that strike. However, it was not to be. The November series Nifty futures expired exactly a strike lower at 5800, even though it seemed till 3.00 PM that the expiry could be at the higher indicated strike at 5900.  

Now a few words on the just concluded derivative expiry. It is so difficult  to believe that the market is not managed on the derivative expiry after observing the strange movements which starts at 3.00 PM and which literally forced the Nifty index to close exactly at a round option strike price. In a normal market situation how much probability is there that the half an hour average of an index ends up within less than 0.25 paise of a round option strike at 5800 ? And that too after the index falling 20 points below the round figure and then rising exactly 40 points to end up at 20 points higher than the strike at 5820. This author drops off the subject with a comment : '"Yeah, strange things happen !!! " 

Nifty Futures - Intra-day Line Chart