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Slide signal in Merrill market dossier

Mumbai, Sept. 9: A leading foreign institutional investor with millions invested in shares today appeared a party-pooper with a warning that stock markets have gone up too fast too soon to sustain its gains.

“The market has run ahead of itself and is not ready for bad news,” said a report from DSP Merrill Lynch, a key foreign fund that shovels its dollars into Indian equity.

Historically, said the report, the markets have faced resistance around 4300-4500. “We are now close to the psychological barrier.” Analysts see this as a veiled pointer about an imminent technical correction.

“We believe the market needs to digest its gains before we can see a further sustained rally. While fundamentals are attractive, we feel that the market is not ready to absorb bad news. Apart from slowing FII flows and a correction overseas, our concerns primarily relate to possible tensions on the Ayodhya issue and the threat of a slowdown in reforms ahead of state assembly elections,” Merrill Lynch said in its report.

In a stroke of coincidence, the trading floor pointed that way: the sensex took a bow, declining 9.05 points to 4425.20. However, most operators felt all was hunky-dory.

Investors were concerned over Merrill’s forecast of a correction to 3800 points, but the silver lining was foreign investors’ perception that the markets are in a bull phase. “From a year’s perspective, we see the sensex hitting 5000, after the formation of a new government,” DSP Merrill Lynch’s Jyotivardhan Jaipuria said.

Fund managers agree a correction is needed to make the rally an enduring one. “Discomfort is not with where we have reached, but the speed with which we got here,” says Sanjay Sinha, UTI’s fund manager.

The sensex has appreciated 38-39 per cent in three months, of which 15 per cent came in a month, an analyst said. That rapid-fire trend is what bothers many.

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