How does Mass psychology play its role in stock market during times of uncertainty? A short observational article from an investor

Nepal Stock Exchange (NEPSE) is the only one capital market of Nepal which is in operation since 13^th January 1994. Nepalese stock market seems highly volatile in nature. Looking at the global scenario all the sectors of economy are adversely affected by COVID-19 and stock market too. In most of the developed economies, the capital market reflects the national economic direction. But in case of Nepal, capital market shows somehow different short term direction as compare to the national economy which is clear from historical data as well.

Due to the impact of COVID-19, the country is in lock down situation since 24^th March 2020 and since then NEPSE was also closed till 11^th May 2020. The operation was resumed from 12^th May as per the directives of SEBON and provision made by Nepal government. In line with the directives, the market was in operation from 11am-1pm with up to 3% of fluctuation in individual stocks and 2% in NEPSE index. On the Third day of operation SEBON has informed NEPSE to halt the trading activities till 2nd June, 2020 considering the worst case scenario of COVID 19. While analyzing the market trend it clearly shows that there is a high selling pressure in the lower circuit price with no buyers at all in most of the stocks.

A market is normally driven by mass psychology.  Traders and investors are involved in the market for buying and selling the stocks. Stock price and trend is determined by demand and supply force. Market is highly volatile when the traders are actively involved in the market. In current situation there is not the feasible environment for traders due to the new guideline of circuit breaker. Traders only show up in the market when there is the chances of high degree of fluctuation. Looking at the floor sheet of two consecutive days, most stocks are traded only 3-4 times in very low volume with lower circuit. It appears like SEBON just wants to control the short term bearish trend through its directives that has got some restrictions in place. But at the same time, it has excluded many traders from their intra-day trading strategy which would contribute a lot in daily turnover. Mass psychology perceives that slow and steady downfall will initially take the market in lower low which will bounce back with the active involvement of traders. In the present context, traders are expected to take a sale position at the beginning stage or take wait and see position so as to start buying during later days with the speculation of short term bounce back after the several downfall. The mid-term and long term investors who have set their plan to exit the market at this time are actually in  a panic mode. Some of them would even go in a panic sale mode while few of the smart long term investors are holding their stocks despite of depreciation in their portfolios.

Keshab Bhattarai

(Investor in capital market of Nepal for 5 years and a finance person in a development organization with experience of research work in Nepalese Financial market.)