reasons of collapse of indian stock market on may 10?

Question

Please tell 4 or 5 reasons of collapse of indian stock market as on may 10.

Answer 1

India is experiencing an economic boom. When a country experiences an economic boom, that is usually reflected in their equities market. Now, under normal circumstances, markets will grow at a rate that would be considered "normal" which varies from market to market. But during economic booms, speculation in the markets gets heated and the market grows too quickly. Stock prices move way out of line with true valuations. P/E's get really high, book value is ridiculous, but the general public sees nothing wrong, they think this is normal.

If you look at the BSE, from late 2001 to May 10, 2006, the Sensex grew from 2600 to 12,600 - over 10,000 points in a litte over 4 years. That is a classic speculative bubble. Money flows into the market, people see it climbing and don't want to miss out and they jump in driving prices higher and it becomes a vicious cycle. When this happens, valuations get way out of line, stocks trade for more than what they're truly worth.

In the U.S., we experienced the same thing from the early/mid 90's to 2000. The only difference is that U.S. markets haven't begun to correct. Watch, when the excesses are finally worked out of the U.S. equities markets, the Dow will be trading in the 3000 range and possibly as low as the 1000 range.

With the Sensex, they experienced a classic speculative bubble. People were borrowing money to get into the money. One gentleman I read about borrowed a huge sum of money and got into the Sensex at the top. Now he has no idea how he's going to pay that money back.

Bottom line, the Sensex experienced a speculative bubble, and all bubbles pop. And when they do pop, it's usually ugly. The market has to get rid of the excess.

By the way, I don't believe the BSE is finished bottoming. The General rule of thumb is when a bubble pops, the market will give up 90 to 100% of all the gains from the previous run up. In theory, you could see the Sensex lose another 8000 points before it bottoms out. Will it? Maybe, but only time will tell.

If you can, I recommend you get the book "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. He wrote the book in the 1850's, but it so applies to today. As you read it, see if you don't see similarities between what happened back in the 1600's and 1700's to what is happening in the equity markets today. Although the items traded may be different, pay attention to the human behavior that occurred back then and compare it to today.

Answer 2

Why do you need a reason?

You pre-suppose that there is one, and that someone actually knows the reason, or worse, controls the reason.

The markets fluctuate. That is what they do. They have a mind of their own. Some look forward six months or more. Are you asking us to "forcast" the reason?

Sometimes, there is no reason.

It is better to know what to do at certain price levels, support and resistance, and to know how to increase your odds and protect your investment than to try and predict or find a "reason."