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Sentimental Economy

In Online stock trading, Equity Research Analysts around the world broadly justify their position on a security based on some fundamental or technical analysis. Fundamental analysis as the name suggests takes into consideration fundamental aspects of a company, to name a few cash flows, financial ratios, company’s board of directors and their vision etc. This involves analysis of financial statements namely P&L statement, balance sheet and cash flow statement. Further it also takes macro and micro economic factors into consideration, the chronological consideration of which defines a top down or a bottom up approach. It basically discovers price and concludes whether a stock is underpriced or overpriced.

Technical analysis isn’t that technical as the name suggests, the basic assumption over here is ‘History repeats itself’. It says all information is already reflected in the stock price, it moves in trends and patterns as identified by some experts. More importantly it captures investor’s emotions and feelings which can be defined by this glamorous word “Sentiments”.

A combination of beliefs and emotions that explains an action defines Sentiment. It is such a strong word that it can cover up all illogical or irrational acts and on the other side can even make brainy guys act unreasonable. We have been hearing this word very often now days, stock brokers trying to justify their calls, analysts appreciating the upward trend of stock markets. Even if the fundamentals are weak, IIP data showing a dip, inflation continuing to fire up positive sentiments can make investors over-look these statistics and line up for fresh infusion through online stock trading.

Mr. Narendra Modi (Namo) was sworn-in as the Prime Minister of India on May 26^th, there has been a sudden change in the way overseas investors are looking at India. India is now considered a country full of opportunities as it creams out Foreign Investor friendly policies. The stock market seems to be on a rally breaking all records and is just not willing to stop.

The graph over here depicts that even the Sensex has sworn to not to bow down. However, on the contrary let us look at the some vital economic indicators:

Inflation Data:

CPI being at 6.01% showing a continuous upward trend for the last three months.

WPI again following the same trend!

IIP Growth Data:

IIP Growth

After clocking the second lowest dip in February 2014 it is trying to make up in March 2014, however, is still ineffective.

Investors, be it foreign or domestic, seem to be immune to these indicators which at one point of time used to be the backbone of their analysis. Such is the mood of the market that nothing is coming in its way, no one can stop it! Poor UPA guys have toiled very hard to uplift IIP numbers and beat down inflation but weren’t greeted so well, rather they were criticized and punished badly. Monsoon also did not do wonders this time in fact we are just hoping that the IMD does not declare 2014 a drought year.

All this can be very well covered up by this fancy word ‘Sentiment’. People have utmost faith in this government and have already started discounting good results which they expect Mr. Namo to flash. We may well end up with a scenario where economic indicators are showing positive signs, however, markets just sliding down just because these numbers are not as good as they were expected. Sentiment has given us a head start and has set records but will it give us cash to support this rally? A question worth asking. Are we reeling under the bubble created by this Namo effect? It seems that Indian stock markets have become emotional these days and are depicting the overall mood amongst the investors as the weightage of Sentimental factors are scoring over Fundamental factors.

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