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Baa, Bahu aur Sensex!

May 28, 2010

Sensex is on a roll again. Media is inundated with the news of ongoing correction in the markets, having rallied too high too quickly. After a quick run to 18000 in March 2010, Sensex has once again fallen by more than 10%. Some say the fall is not logical and mainly pushed by repetitive global (read European) crisis, while others claim that the fall is inevitable given the unsustainable rally by Sensex and it should correct even more.

There is much debate on this, lots of opinions being expressed on TV, in the pink papers, in the Internet on: Are these rallies justified? Does Sensex need more correction? What exactly should be the course of action for an investor given the extreme volatility of Sensex?

As we know that every stock has a fair value, Sensex too has a fair value. This fair valuation of Sensex depends on the financial performance of its constituent companies. As the earnings of companies go up, the value of Sensex also goes up. But sometimes for some negative economic or sector specific reasons, companies’ stock prices fall irrespective of the rise in their earnings. As a result we see a fall in Sensex.

This can explain current fall in Sensex.  Most of the Sensex companies have registered a good quarterly performance and have reported a rise in earnings. Ideally, incorporating this rise in earnings, the Sensex should be fairly valued at around 18000 levels and it did touch that level sometimes back. But looking at the current global scenario there is very good possibility that any more bad news could lead to a further fall.

So, what should be your action now? If you were part of the intelligent few who made the most of the crash and invested at the Sensex low, you could consider selling some of your stocks which appear to be overvalued. For others who missed the bus last time, could still find opportunities to buy wonderful stocks. Many stock prices have already started falling. A bit of patience and analysis could get you the opportunities to invest in fundamentally strong companies at throw-away prices!

PS: Please forgive me for the heading! 🙂

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