At times it's very impressive to see what the "sentiments" can do to the equity markets. Coming from quite a conservative society that have strong affinity to sentiments, I'd easily relate this to the markets. Sentiments can either drive markets irrationally higher or drive down with utter panic. On days when sentiments are very powerful, fundamentals and technical charts take a backstage.
The week that just ended on 03/04/2009, was a classic example of swinging sentiments within a couple of trading sessions. Monday's session resembled panic selling with Indian markets down by almost 5%. Again, the banks bore the brunt of the assault. The markets have been riding high on a wave of euphoria across the globe, until the run broken by a big fall on Monday. Suddenly, the market looked weak and set to dive down to lows, or at least that is what the "experts and analysts" predicted.
With a lot of hype surrounding the G20 meeting which was to announce its communique on Thursday, the markets prodded along the next two days on Tuesday and Wednesday. There was no clear sense of direction on these two sessions. Without knowing the extent of the policy changes coming out of G20 communique it would have been a pure gamble to go either for a buying spree or shorting.
Thursday, the day the G20 meeting was to end and come out with its communique, saw the markets, globally, gain around 3%-5% with more than average volumes of late. Our own Indian markets closed higher with around 5% gains. This was all before the communique got released after the sessions ended in Asia. This was another show for how powerful the sentiments could be, in this instance, driving the markets to higher levels. This has brought the "experts and analysts" to come up with fantastic predictions, some going as far as saying that the Indian markets are likely to gain another another 10% to 20% from the current levels.
Nothing much had changed, globally and locally, during the week. Fundamentals of many of the stocks has been the same for the last few weeks. Personally, I don't read too much into technical charts, so can't comment much about it. When sentiments are very strong as seen twice last week, there is no room for strong or weak fundamentals, there is no room for strong or weak technical charts. It is up to the individuals to weigh up the risk/rewards and enter or exit the markets. Those who took the risk of entering the markets late on Monday after markets got beaten down, would have been generously rewarded by the close on Thursday.
The lesson is that Sentiment like Liquidity is a powerful player in the markets. So don't ever forget the importance of this.
