Many analysts, including myself feel that this rally is overdone. It was just in March that the Dow hit the 6500 levels and the Sensex fell to the early 8000s. The economic situation in USA (the largest economy of the world) has improved to some extent as we can see in consumer spending, new jobless claims, housing starts and to some extent, housing prices. However, the situation in UK remains grim. Japan has officially emerged from recession and Germany too seems to be doing ok so far. However, does this justify a roughly 50% rally in the Dow or a 100% rally in the Sensex ? I personally think that the markets have gone a little too ahead of themselves and need to correct.

1) The Shanghai Composite too has been heading south of late due to monetary policy concerns, weak earnings and concerns about the economy(Premier Wen Jiabao’s comments).

2) If the world markets see a correction, I am fairly certain that Indian markets will follow suit as has been the case over the last few months; global cues have been playing a significant role in the performance of the Indian markets for a while.

3) The improvement in corporate earnings in USA and India have been largely due to cost-cutting measures and not due to improvement in sales volume or economies of scale. Thus, the optimism about earnings, in my opinion, is too much and too soon.

4) Optimism about economic reform,political stablitlity and disinvestment in India is probably not worth a 17% jump in 2 days(post election euphoria- Sensex).

Therefore, I am selling about 25-30% of my holdings and booking profits.

Question
Why sell only 25-30% and not the whole amount if you think that the markets will see a correction?

Answer
1. I have been saying since June that the rally has been overdone. But we didnt see a significant correction till now.(I dont count one-off 700 point drops as significant corrections.) The Sensex seems upward sticky at the 14500-15000 levels(Technical Analysts call that support). Therefore, these positions are my hedge against rising markets.

2. I am very bullish over the long run and feel that we will hit the 30,000 levels over the next 3-5 years. Therefore, these positions will serve as long term holds.

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