Stock Market caution advised after last week's rally

Last Thursday, soon after the Sensex hit a new all-time high of 21,524.15 points - the previous all-time high had been 21,483.74 on December 9, 2013 - I met Sandeep Ghosh, CEO of Bharti Axa Life Insurance. (The Sensex rose even higher on Friday to touch 21,960.89 and ended the day at 21,919.79 points.) Ghosh and I spoke about how people should graduate from looking at insurance products as investments and instead regard them as savings and protection products. We also agreed that, if at all insurance is used as an investment option, specific policies should be looked at carefully before buying them. I still strongly maintain that insurance should take care of one's risks and should not be an investment product. A classic term insurance policy which is five times your gross annual income should be enough to take care of your risk.

Investment is all about planning one's goals and allocating assets accordingly. Ghosh himself parks all his savings in mutual funds, 30 per cent of which is in equity funds. True, these days he isn't happy with his equity portfolio's performance as mutual funds have not been giving good returns. But he knows equity is the only instrument that can beat inflation and one has to be patient and invest systematically to build a strong equity portfolio.
 
If the entire past week is considered, the Sensex gained 800 points or four per cent. Looked at more closely, it will be seen that it took just one month and less than a billion dollars of additional funds ($953 million) for the Sensex to gain 2,000 points or 10 per cent to touch its all time high. From a low of 19,963.12 on February 4, it reached its new all-time high of 21,960.89 on March 7.

But though the Sensex touched a new high, the market is still highly polarised and the broad market is still undervalued. The stocks that have gone up are technology, consumer, pharmaceuticals and private bank stocks. If these alone were considered, the Sensex would be around 35,000 points. Stocks in other sectors, however, have underperformed and are trading at levels where Sensex would be around 8,000 to 10,000.
 
Last week's rally is primarily an election mood rally based on the growing presumption that the National Democratic Alliance has a greater chance of forming a government at the Centre after the polls. The pattern is a familiar one: over the past five general elections, the BSE200 index has rallied an average of 12 per cent in the three months prior to the elections. With the Sensex having already gained 10 per cent in the past month, investors should now tread cautiously despite the mood being buoyant.
 
Another reason for the Indian market rising is concern about slow growth in the West and the expectation that tapering will slow down and quantitative easing will continue for longer than earlier predicted. This sentiment also helped the rupee to appreciate, which in turn augured well for the market.

FII inflows have been crucial to the behaviour of the Indian equity market. As long as the inflows continue, the market will be fine. But what goes up fast also comes down quickly. Some correction is expected in the coming week. Until the elections are over, the market will remain volatile reacting mainly to global cues, currency and FII flows.
 
Both domestic and global economic data will also make a difference in the coming week.

On Wednesday, March 12, industrial production data (IIP) for January 2014 as well as the consumer price index (CPI) for February will be revealed. On Friday, the government will declare the wholesale price index (WPI) data for February. On Saturday, figures of corporate advance tax payment will be unveiled. The last will give an indication of what March quarter results will be like. On the global front, on Thursday, the US will be announcing its key retail sales data. Over two-thirds of the US's GDP is driven by consumer spending, making this a key data point for the market.