For the past many months, we have been waiting for Nifty to give a deep correction, in line with our perception of the economy. But that has not happened.
Initially, we thought that distribution may be taking an extraordinarily long time, in view of the scare caused by the crash in 2008. Perhaps that was true as scared investors did not seem to be wanting to take positions, especially at high levels. But this seems no longer true.
Analysis in F&O segment shows that the positions in index are about two times what they were in Jan 2008, just before the crash. Enough to raise a red flag of caution.
We may or may not crash yet. But we must be cautious in investing.
Friday, September 3, 2010
Are Markets manipulated?
Many believe that markets are manipulated. In fact, many investors do talk in terms such as, "this stock has gone up because an operator is active in it". Such talks seem to suggest that the stock/market is indeed manipulated.
So, is the market manipulated? My answer is "It depends". It depends on what is your definition of manipulation.
Lets say, a person takes a long position in the index future assuming that the market would go up. But, the market starts moving down a bit. The options before this person would seem limited to either booking a loss or hedging his position. But what if this person has lots of funds at his disposal, much much more than that in the hands of most people? He now has another option. He starts buying a index heavy weight. This would probably cause the price of the index heavyweight to rise and in turn lift the index. Would that be called manipulation? Surely, there is an attempt to manipulate the index up, but surely this cannot be classified as "manipulation" with a negative connotation attached.
It is true that a small number of high net worth individuals contribute to most of the action in the market. But this is true everywhere in the world. They cannot "manipulate" a market until and unless they act together. In organised markets, such a coordinated act is hardly possible, especially with regulators around. What happens simply is that people are part of a herd. Herd action itself leads to spikes and sharp unexplained dips in the market. So blame the strange market moves on herd mentality and not manipulation.
So, is the market manipulated? My answer is "It depends". It depends on what is your definition of manipulation.
Lets say, a person takes a long position in the index future assuming that the market would go up. But, the market starts moving down a bit. The options before this person would seem limited to either booking a loss or hedging his position. But what if this person has lots of funds at his disposal, much much more than that in the hands of most people? He now has another option. He starts buying a index heavy weight. This would probably cause the price of the index heavyweight to rise and in turn lift the index. Would that be called manipulation? Surely, there is an attempt to manipulate the index up, but surely this cannot be classified as "manipulation" with a negative connotation attached.
It is true that a small number of high net worth individuals contribute to most of the action in the market. But this is true everywhere in the world. They cannot "manipulate" a market until and unless they act together. In organised markets, such a coordinated act is hardly possible, especially with regulators around. What happens simply is that people are part of a herd. Herd action itself leads to spikes and sharp unexplained dips in the market. So blame the strange market moves on herd mentality and not manipulation.
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