Stock markets are in consolidation phase

September 15, 2014 marked the 60th anniversary of the filming of one of the most iconic images in cinematic history - a delightfully uninhibited Marilyn Monroe laughing as the updraft from a Manhattan subway vent billows her skirt skyward. Such is the allure of the scene from The Seven Year Itch that the dress sold for a record $4.6 million in an auction.

This piece of Hollywood history may well be the least obvious place to look for clues to the gyrations of the Indian stock market. But the answer lies in a temporal variation of the title. I call it The Ten-Year Itch. India is and always has been a net importer of capital with a relatively fragile balance of payments and a notoriously illiquid stock market. Roughly every 10 years an entirely new crowd of fund managers in Manhattan wakes up to the screamingly obvious D's of Delhi - democracy, demographics and demand. Invariably, risk capital finds its way into India. Unlike the Chinese, they even speak English, how cool is that? And while a few billion dollars of buying/selling barely nudges an Apple or Google, in India it creates a loud blowing (or sucking) sound.

But as the markets are swept away by the euphoria surrounding a new regime, lets pause and reflect on the nature of this rally. Clearly, global risk appetite has much to do with it. It seems fashionable to run down the vanquished old guard, but much credit is due to Raghuram Rajan and P. Chidambaran for decisively engineering an improved capital account and fiscal deficit, which was an essential pre-requite to this rally. As for the election itself, markets invariably rally following major leadership changes, not just in India but, for example, recently in Mexico, China and Japan. These rallies tend to be ephemeral.

Yet there is no shortage of analyses justifying and projecting ever higher targets for the Indian markets - macro regressions, valuation comparison, fund flow data suggesting increased domestic participation. The harsh reality is without truly meaningful action to address the well known structural bottlenecks that have traditionally held India back, this rally seems destined to follow the pattern of decennial foreign liquidity driven phenomena. After the initial "pop", we're currently in a consolidation phase, following which - event risk notwithstanding - were likely to see a final "blow-out".

My bottom line? As the legendary David Swensen, who manages Yale's $20 billion endowment, once told me, markets like India tend to be momentum trades, and market timing more than stock selection is key to outperformance. We're in that sweet spot now, and 9,000 for the Nifty and 30,000 for the Sensex seem reasonable medium-term targets. Enjoy the experience, just remember to pull out in time.

(Alok Sama is president and founder of Baer Capital Partners)