Pre-election Rally? What is it?

Nifty has soared around 700 points from the lows of Jan 2014, and suddenly the spike in some of the high betas is enormous and surprising. What has changed suddenly? or it is just the pre-election hope rally. There are diverse views from analysts to fund managers who attribute it to changing ground macros, modi factor and many often call it under-ownership in Indian stocks specifically banking. 

Well, nobody knows and everyone has a theory around the recent rally in Indian stocks. The reasons that make more sense are 1) There is some sort of pre-election rally (hope of a more liberal, stable government) 2) Russian markets are down due to Ukraine issues 3) China slowing down a bit, though some are of view that the china slowdown fears are overdone. Reasons 2 and 3 sound more convincing, as lot of money has flown out from the Russian, Chinese and Japanese markets and with Brazil, Argentina and Africa markets not performing there is no other place to park these funds other than India. For 1, my sense is that there is lot of euphoria around new government, and reality may surprise us. I think it will be tough for BJP to form the next government with clear majority as the party has limited presence across India. It will be more of a coalition government.

The bigger problem is not market rallying but what you should do as an investor or a trader at this juncture. For investors, is it the right to take some money off or you have already missed the bus and wait for the fresh entry? Again, I think it is okay to take some profits if you have already some investments and don't enter fresh. 

For traders, it is too a difficult market. The cash needs to be deployed to make profits, but with index scaling new heights every day, there is a feeling how much it will go, and shorting can be a loss game. Option writing is too risky as the volatility will be rising before elections, so don't be fascinated by juicy premiums. Buying call options seems to be a good strategy and with the VIX rising, premiums may get expensive for a profit. Look for long straddles or strangles to play before the elections outcomes at appropriate nifty strikes.

Guess, best for investors is not to make any fresh entry at this stage till elections outcome is clear. Trade in only index stocks if you have a desire to do so, and buy positions in a staggered manner. 

Whatever you do, stay invested...and be ready for volatility