Stock market in resilient mood

Benjamin Graham said that the market always surprise its participants. The market started its steep climb from November 2005 and reached the apex of 12,500 by May 2006. Suddenly, there was a downturn and market started falling, initially by 100-200 points. Then, there was panic all around and soon the market was trading at 8,900 levels by the middle of June 2006. Within a month the exuberance in the market had turned to extreme pessimism. Since then the market recovered and is making new highs. Often, it is correcting by a few hundred points but the market is showing a lot of resilience by bouncing back immediately. This shows the general mood is currently bullish and smart investors are willing to bet their money in the Indian economy. What moves the market? In the short term, behavioral irrationality of the market participants can take the market to extreme levels. But in the long run, the market valuation has to converge with the underlying fundamentals of the economy and the corporate performance. In May 2006, the market had reached excessive levels ignoring some deteriorating fundamentals. The crude price was ruling at an all-time high of $78 per barrel, inflation was rising and the Reserve Bank of India (RBI) was forced to increase interest rates. This would have been detrimental for corporate profits and there was a fear of slow down in the economy, which prompted the market to correct and reflect the changed fundamentals. Currently, the economy looks much healthier. The oil price has cooled down, the corporate profits were good for the first half of the year and they have given good guidance for the rest of the year. The economy has grown by nine percent in nominal terms in the first half of the year. This translates to a growth of 14 percent in real term. If the economy can maintain the same growth rate for the rest of the year, we can assume that the companies that are part of the Sensex will grow by at least 20 percent.