Is The Current Market Wave At NEPSE a Pump and Dump Scheme or a Bullish Run?

I am usually writing about the stock market so that people would understand the concept behind investing to help them retire with a sufficient amount of wealth. Per usual, I am writing this article to spread awareness amongst the regular investors about current investor psychology and the trend in the stock market. In recent days, the unprecedented rise of the stock market index seems to be a little concerning to me. So, I believe I can put forward an opinion on the current market wave at NEPSE. I hope you will put forward your viewpoints in the comments section below.

Is the market really bullish? Everyone was anticipating a massive drop in the stock prices after NEPSE began its operation from the 29th of June 2020. It did indeed drop by 4% in the first few trading hours. Then, the price action of the market shocked everyone. The market increased in value in the midst of everything that is going on in the world at the moment.

The altering correlation between the economy and the stock market of Nepal is creating a sense of confusion amongst the investors. Their sentiments are absolutely valid as well. We have seen this pattern of emotional trading before. People are following the trend blindly with the fear of missing out. The growth of the market is enticing vulnerable people with a seemingly desperate financial situation.

Illustration:

For a market to be in the bullish run, the volume of stocks should directly proportional to the value of the stocks. This means, when the volume of stocks traded is high, the rise in the value of stocks signifies the bullish run. Likewise, when the volume of stocks traded is low, the decrement in the value of stocks signifies the bullish run.

The volume of stocks traded is inversely proportional to the value of the stocks to signify the bearish trend. If the volume of the stocks traded is low, the rise in the value of the stocks signifies a bearish trend. Similarly, if the volume of stocks traded is high, the decrement in the value of the stocks signifies a bearish trend.

Looking at the market closely, I can see the stock prices are rising despite the volume of the stocks traded is historically low. This could be a sign of the pump and dump strategy of the bigger investors who have excess cash to push the market up.

Let us take an example, Himalayan Bank Limited (HBL), with the market capitalization of Rs. 50 Billion as of the 1st of July 2020, has only 299 units traded for its value to rise by 9.82%.

Another example to be taken is Surya Life Insurance Company Limited (SLICL). For this company to hit a positive circuit, the volume of stocks traded has always hovered around 10,000 up to 200,000 units. However, during the current trading days, the volume of SLICL has stayed around 4,000 units and it is hitting the positive circuit continuously.

I want to take another example of Vijaya Laghubitta Bittiya Sanstha Limited (VLBS). This scrip has only traded 40 units for the 1st of July 2020 and its value has increased by 8.09%.

Conclusion:

The market could really be moving towards the upward direction. However, we shouldn't forget that the stock market is the mirror of our economy. Even if the stock market doesn't seem to follow the direction of the economy in the short term, in the long run, the stock market must follow the trend of the economy.

I want you to take a deeper look at the economy. Is the economy really good to justify the current trend of the stock market? Probably not. The institutional investors are attracting investors with vulnerable financial status to make them believe they can make a lot of money during the time of crisis like this. We should stay focused and not run towards the trend with the fear of missing out.

Always remember to be greedy when others are fearful and to be fearful when others are greedy.

Connect with me on LinkedIn and on Twitter @surajmarahatta

suraj.wonder.8596@gmail.com

Disclaimer: Investing can be risky and it can turn out to be hazardous as we grab a wrong notion of investing. So, do not take this article as financial guidance. Always consult a licensed CFO or portfolio manager for your particular investment plans and financial goals. Neither ShareSansar nor the author is responsible for the losses incurred in the stock market.