Friends,

The three Ace Points to be noted down are:

• Shares cheap on historical basis, but selling pressure remains
• Recent quarterly results indicate a significant slowdown in corporate profits
• EPS estimates are down substantially, but downside risk persists
  
  As market capitalization has dropped, the leverage of the market (debt to market value of equity) has increased, and this increase in leverage has caused an increase in volatility that is unlikely to decline until the market recovers. Improvement in global sentiment and interest rate cuts and other policy actions in India and in other countries have led to a bear market rally. This rally may last a while, but will certainly end by the time investor start focusing on next quarter’s results (i.e. until mid-December) or if economic data released in interim disappoints
  
  However, domestically, interest rate cuts have helped. However, despite the RBI taking multiple measures, financial markets remain somewhat clogged. While overnight inter-bank rates have declined significantly, longer term rates remain elevated; the 3-month inter-bank rate is 11%, well above the 7.5% policy rate of the central bank. However, the 3-month rate has declined by about 110bp.
  
  
  But this time could set records
  It is thus tempting to say that the recent lows indicate a market bottom, but risk aversion remains strong, and fund outflows may drive the market even lower. Although risk aversion has been extremely high, it is unlikely to get much worse. Thus, the downside risks from the lows of October are limited, but an index decline below 8500 cannot be ruled out completely. Still, we do not think it would fall much lower.
  However, there are no triggers for the markets to rally from here. Valuations may be favourable, but that in itself is not a trigger for markets to head higher. In fact, the stock market may not recover until earnings growth recovers, which is likely in 2H09.
  In the past month, the earnings yield of the Sensex has remained higher then G-Sec yields, indicating attractive valuations. Another indication of value is the distribution of PE multiples: currently 276 companies are trading at single-digit multiples.
  
  Risk
  The main risk to stock market is of the sharp selling-off on account of investor panic. FIIs have been the heavy sellers, and holdings of FIIs have decreased from 15.5% of the market at the end of December 2007 to 13% at the end of September 2008. After selling in October 2008, FIIs holding dropped to ~12.5%. So in summary FIIs has sold out 22.5% of their holdings. Now the Main query is “UPTO WHAT EXTENT CAN FIIs Holding can drop”. Here is the answer Key number is 9.5% , level of foreign holdings at the beginning of the bull run in March 2003. The nightmare scenario is for foreign holdings to fall to zero. This scenario is unlikely. While a number of existing players may exit and new one will step in. However the possibility of FIIs holdings falling to 9.5% is very real. The implications of this for the index are serious; index may fall significantly from current levels.
  
  Still I think that more bad news are waiting to come and will drag market to lower levels. One should wait for some time for some lower levels may be around 8500 or even lower. Please remember this is a bear market rally and may not sustain, however this rally is a gold mine for short term/day traders but that involves a great amount of risk.
  Once again I will emphasis on gas and industrial sectors to buy in. I will publish the list of stocks that are my favorites in next post.