After much uncertainty and talks of a big sell-off in the market being voiced by many, the Sensex scaled a new 52-week high on Wednesday.

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So, are things all hunky dory again and are we going to keep heading higher now? If anyone had the skill to truly call that, Warren Buffett would not have been considered by most the smartest equity investor.

But, what is also intriguing many is the reason for this big rush up to the top. There is no easy answer. The market moves are driven by myriad forces interpreted differently by active traders and investors participating in buying and selling of shares.

However, what does seem like a plausible explanation is that there has been a rush to quality stocks after the sell-off in the global and emerging markets.

Money Moves Stock Prices

Remember, money moves stock prices. And here’s a contention to support this argument. Let’s ask ourselves what kind of money it might take to move the Sensex up by about 13 percent from its low in March this year. If you work with the free float market capitalisation of the index, it works out to about Rs 4 lakh crore in value.

So where did this money come from--when foreign investors have been selling all these past months and mutual funds have netted just about Rs 30,000 crore in the last quarter?

For this, you need to look at the midcaps. If we look at a broader index like the BSE-500, we find that it lost about Rs 7.6 lakh crore of its free float market capitalisation in the slide between January and March. Today, it has regained only a little over Rs 4 lakh crore in free float market capiatalisation. The index still needs to gain over 5 percent to reclaim its high earlier in the year.

The implication is that money has shifted from the midcap stocks to the heavyweights. Do note, the above math is only indicative and it does not actually indicate the magnitude of funds that have moved.

To give you a sense, some stocks don’t see a turnover of more than a few crores in a day. The net investment required to take a stock up may be quite different from its market capitalisation change.

Bottomline

It is likely the rush for quality is being funded by the exit from the lesser peers through a portfolio churn. How long this will continue is anyone’s guess. But what’s sure is that this can’t go on too long unless fresh money joins the party.

First Published:Jul 12, 2018 4:00 PM IST