Seller’s Strike…

With Nifty flirting around 10K milestone, it is busy time for business channels and financial portals. All of them compete with each other with screaming headlines on how so and so stock has multiplied so many times in such a short time. Number of such stocks that have skyrocketed keeps growing by leaps and bounds. It is no accident that much of these stellar stocks are from the infamous group of tiny or micro caps. The reasons are not difficult to fathom.

In many cases, the surge in prices is more to do with lack of sellers than to do with aggressive buying. Incessant rise in price has led to sellers going slow on fear of premature exit, leaving many counters with few buyers driving up the prices. As a result, stocks are soaring amid thin volumes. In such a scenario, even a small selling when it comes, could leave a deep crack in some of these celebrated multi-baggers.

Though this trend is more prevalent in tiny caps, the rub-off of this trend on wider small and midcaps is one of key reasons for elevated valuations in the broader markets. As anyone who had attempted to sell even marginal quantities would know, the prices are very unreal and portfolio value could see a big erosion even on small selling. Given such a fragile nature of valuation, one should be very careful not to take the sharp rise in portfolios at face value. Tide does turn and when it turns (no one knows when), it will be a turn for the buyers to strike. When that happens, the whole momentum game  could play in reverse, esp. for tiny and micro caps. It is time for caution for the overall market, esp. when it is driven by surge in liquidity rather than by ever-elusive earnings upgrades.