Why stock market is going up today? This question might come to your mind each time the market goes up. More so, when the situation is like today.
The number of Corona cases are rising. People are losing their jobs. The GDP growth has suffered the worst ever crash.
Yet, the market has gone up 50% from its March low.
People simply do not have an answer to this question.
3 weeks ago, even the RBI Governor was as confused as everyone else. He said “the stock market is not in sync with the real economy, which will result in a correction”
But the market has not fallen. In fact, it continues to climb higher. Slowly, but steadily it’s going up.
Why is the stock market going up?
To understand this, you need to understand the market psychology. The market moves in a particular direction due to momentum and sentiment.
Back in March, the momentum was in the downward direction. The sentiment was extremely weak as there was fear all around. People were predicting dooms day and rightly so.
Flights were grounded. Businesses were closed. Everyone was asked to stay at home. This has never happened before.
When business goes to zero, there is no meaning to the stock market – it gets its valuation from business earnings after all.
Yet, when the prices are crashing and everyone is selling out of fear. There is one thing that gets created.
Remember the Warren Buffett quote “Be fearful when others are greedy and be greedy when others are fearful”
During an extremely fearful situation in the market, there are a few ‘smart investors’, who are able to see beyond the gloom and doom.
When people are selling their shares at throw-away prices, they are able to see value in businesses.
It’s at this time that big investors start buying. When they buy, the strong downward momentum gets broken. The shares that are sold get absorbed by the strength of buyers.
The direction of the market changes.
When the direction of the market changes, the sentiments also change.
A few big investors buy, the market rises. This gives hope to a few more. They buy, the market rises more.
This is when those who are ‘short’ on the market also begin to fear and start covering their shorts. This leads to more buying.
This momentum, which was in the opposite direction until a few days ago, has made a U-turn.
Suddenly, more people are positive and begin to look at life beyond the virus. What will happen in 2021? Will business and life get back to normal?
The questions have suddenly changed. From fear to hope.
This is how momentum and sentiments change in the market. It can happen very quickly, giving investors or traders very little time to react.
Remember – the market hit a multi-year low on March 23, exactly on the day the Prime Minister announced the nation-wide lockdown. The worst was already priced-in when the lockdown was announced.
The cases back then were very low. Now, there are nearly 1-lakh cases everyday, yet the market doesn’t seem to care and continues to rise.
That’s the stock market for you. It’s irrational, it’s momentum and sentiment driven. Both its rise and fall can be beyond your imagination.
Market rises are slower in nature
Crashes can be brutal, but the rise is usually more gradual. Slow upwards movement.
The Nifty chart from the beginning of 2020 till September illustrates exactly this.
Check it out:
Notice how the market fell. Within a span of 30 days, the Nifty had crashed from 12000 to 7500.
The rise has been slower. It’s almost like the Nifty came down on the lift and is using the staircase to go up.
Even stocks can show the same pattern, sharp fall and slow rise.
That’s how the market can behave and we as investors have got to be prepared for this at any given point in time.
Successful investors can hold stocks for a long time
It’s very easy to say Rakesh Jhunjhunwala bought Titan when the share price was ₹ 3.
Buying is easy, but holding the stock after it has doubled, tripled, gone up 10 times and more is very very difficult.
Most individual investors, even if they had bought Titan at ₹ 3 would’ve sold it when the price went upto 4.
Buying a good company and holding it for a long period of time is more difficult than you think.
Check out the chart of Titan below:
Jhunjhunwala bought the shares of Titan when the price was around ₹ 3 (bonus / split adjusted). But look at how the stock has performed. In the long term, the price has gone to 1300 and above.
In between, Titan has crashed by 60% – 50% – 40% – 30% quite a few times. And currently, in spite of the fall in price due to Covid, 50% of his portfolio is invested in Titan.
To replicate this is very difficult. It takes immense conviction and understanding of the business, along with courage and mental strength. That’s the reason why he is one of the most successful investors in the country today.
Successful investors are those who can buy the right company at the right valuations and ride it through its ups and downs.
It takes time to develop the skills needed to become a successful investors. Not just the analysis part, but also the behavior aspect.
Which brings us to the main short-term question:
Why stock market is rising today?
The analysis in this section will be fundamental as well as technical (charts).
Each time the market rises by 1% or more, this section will be updated with our analysis on factors that were involved.
Market Rise on 10th September 2020
Nifty was up 1.52% and Sensex rose 1.69% on 10th September.
Was this expected? Yes, it was.
A few hours earlier, something similar happened in the US markets too. Dow Jones was up 1.6% and Nasdaq Composite was up 2.7%.
In the last few days, the direction of move in the Indian market was very similar to the US market. Although the fall in India wasn’t so sharp.
US stocks had seen a major correction, especially the tech stocks. The Nasdaq was down nearly 10% in just 3 trading sessions. Whereas the Indian markets were down only by around 4% in the same period.
This was a sign of strength and also a clear indication that the market direction was still firmly upwards.
Today, the markets shot up. Not just the big stocks, but mid and small caps also showed strength.
Nifty and Sensex the two major indices showed extraordinary strength. This strength was due to one company – Reliance Industries, which is proving to be unstoppable.
Reliance is showing the direction in which the broader market could follow in the days to come. The leader of the bull market is usually the first to rise. The corrections that the leaders show are small and the rises are big. Reliance is clearly showing signs of a major leader in the days to come.
The momentum in Reliance is also due to the constant news flow. Some of the biggest companies in the world invested in Jio Platforms. Now, many big companies are showing interest in Reliance Retail.
Individual investors, who are new to the market, have got to be careful here. Reliance is leading a technological revolution in India and the company could still be under-valued at this point.
But at more than ₹ 2300 per share, the good news is priced-in, along with the earnings for the next few years. That doesn’t mean Reliance will stop, the chart is still bullish but value – which every long term investor should look at – is clearly missing this point. It’s better to look at the other companies until Reliance gives a meaningful correction.
The strength of mid and small caps is also a healthy sign for the days to come.
The Metal sector corrected today after rising a lot in the last few months. Bank Nifty (the bank index) continues to remain weak. It’s a sector that could remain under pressure for the next 1-2 years.