Stock markets are a continuous discounting machine. The proponents of the efficient market hypotheses will want us to assume that every news or event which has a material impact on the prices are continuously discounted or built in the price by either upwards or downwards movement in the stock so that at any given time, the price truly reflects the impact.
While I don’t really subscribe the hypothesis like a true believer, my years in the markets and readings of the history has made me realise that the markets discount at least six months into the future and even though it does react to the daily news flow, the bigger price movements happen with an eye on the way ahead, not in the rear view mirror.
Let’s s go back to some history on this. In 2008, the markets bottomed out in March of 2009 when the entire world was in shambles. The US was officially declared to be in recession only in June of 2009 whereas the markets had already moved ahead. Similarly, the market famously bottomed a day before India announced its Covid lockdown in March 2020 when the vaccine was nowhere in sight and the world still didn’t know what exactly happens in a lockdown. So the price impact on the way down happens much faster than we imagine and the bottom, though can never be predicted, happens sometime when you are actually sure that there is enough downside ahead.
So why am I talking about this topic today. I have two major talking points; one concerning with the larger market movement and the second with regard to the uncertainty on the F&O weekly expiries.
First, the Indian market has basically been negative for the past one year with relentless FII selling. Every good news has been ignored and every Trump, Dick and Harry has caused major drop on the downside. We first had the tariffs, then the 50% tariffs, then the H1B rules and now the pharma bomb. Overall, we have failed to meaningfully cross the previous year’s highs in multiple attempts.
Second, the uncertainty on the F&O expiry has caused severe price damage in broking and exchange stocks and they are moving down with every negative news which generally is source based and reported majorly on CNBC in the afternoon, leading to an almost synchronized fall in the stocks after 2PM on multiple days. The same news is later denied through other sources on other news channels and even Nitin Kamath of Zerodha publicly called out such rumor mongering recently.
While I totally believe that any strict implementation of F&O rules will lead to lower volumes and therefore revenues for all such players, I also am reminded of the fact that the market discounts the future and not the past.
Remember how in 2022, the price of oil boiled upwards when Russia Ukraine conflict started but has since remained in the 60-70$ range even when two more wars in the Middle East are ongoing. The market kept moving up even when the vaccine for Covid was not in sight and the lockdown were in place for far longer period than originally intended. So this tells us that one piece of news causes price damage once and not repeatedly, even when the severity is higher.
So how does these stocks and the market keep falling repeatedly on the same news flow almost in sync? What I believe is that the retail has made a lot of money in the past five years and the bigger players, the institutions and the UHNIs have missed the bus as they were ill advised by their brokers. Thus, for the first time, a larger pie of the Indian market is owned by retail while the FII ownership is at multi-decade low. So, in my limited view, this is a clever tactic by large operators to tire out the retail into selling their stocks which still have a huge runway ahead by causing repeated price damage so that the stocks can be bought for cheap. Please see how the mega multi-baggers in Defence, Power etc went down 40-50% in a couple of weeks and were back to life highs soon enough.
Similar play is at work, in my understanding, in the broking-exchange stocks as well. The STT and Capital Gains tax is now a prime contributor to the central government budget especially with large reduction in GST and Income Taxes. If you think that the government will kill its golden goose with such ease that the entire fiscal math goes for a toss when major elections are around the corner, you may be reading too much. So even with all the noise around the weekly expiries, the F&O business isn’t going anywhere in India also because this is a stated policy of this government to make India a global financial hub. So, you can’t kill an industry which is torchbearer of the national flag.
The point of maximum pessimism is also the point of highest return. The hated sectors today include the likes of IT, broker-exchanges and now possibly pharma. I would only point out to the time when for Rs. 100, you could buy almost 10 different Public sector banking stocks which later all went up 5-10x! similarly, the hated PSU stocks delivered multifold returns in not-so-distant times.
Let’s keep our eyes open and see what the price action is telling us and hopefully we can look back at September 2025 as another great time to buy in three years from now!
Disclaimer:
The views expressed in this blog are personal opinions and are shared for educational and informational purposes only. They should not be considered as financial, investment, or legal advice. I write primarily to document my own learning and thinking process. I am not a SEBI-registered investment adviser, research analyst, or financial influencer, and no part of this blog should be seen as a recommendation to buy, sell, or hold any security. Please do your own research or consult a qualified professional before making any financial decisions.
Life is all about Compounding! 