What is holding back the stock market?

It's been slightly over a month since the Budget was announced. Apart from the provisions in that policy document, there have been several developments in the past five weeks.

The Reserve Bank of India (RBI) has made its first policy rate cut in three years. Full year results have started flowing in. Several sets of macro-economic numbers have been released.

The stock market has, however, barely moved since the Budget. The Nifty closed out the Budget session at 5320 and it closed out last Friday at 5291.

This sort of indecision is explicable only in circumstances when market participants are waiting for some key triggers.

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In this case, I'd guess that one of the triggers may be more clarity on the tax and the General Anti-Avoidance Rule (GAAR) regime. The notifications are still not finalised. There is a lot of frantic lobbying going on, both in the public domain and behind closed doors.

Will the government start retrospectively opening up tax cases and if so, how far will it go? What sort of tax liabilities will it impose on money coming in from abroad? I'm a case-hardened cynic so I'd expect the answers, as and when they become apparent, to have a negative impact on bottomlines and valuations. The issue is really one of degree, rather than direction.

The institutional attitude was negative during the past three weeks. Domestic institutional investors (DIIs) have been net sellers but that is no surprise since they've been unenthusiastic about equity for a while.

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However, foreign institutional investors (FIIs) also turned sellers in Q1, 2012-13, at least in the equity segment after buying huge quantities through Q4, 2011-12.

At the moment, trading volumes are on the low side -- another sign of either indecision or bearishness. Hence, domestic retail and operators have been able to balance off the institutional selling pressure by doing some buying.

But in historical terms, the stock market has rarely been able to sustain a bull run over extended periods when the institutional consensus is negative.

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Unless the institutional attitude and more specifically the FII attitude turns bullish again, it's difficult to see valuations rising, purely on the basis of retail enthusiasm.

Coupled to the increasing trade gap, a lack of forex inflows continues to make the long dollar trade seem quite attractive.

We've recommended a long USD/INR position before and the greenback is now at a three-month high. The trend looks sustainable and the rupee may hit a new all-time low. RBI seems to be hesitant about intervention because it doesn't want to draw down reserves.

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One positive for the market has, of course, been the rate cut. RBI has surprised twice in its attempt to impart liquidity. It made a big cash reserve ratio cut of 75 basis points in March and then it slashed the repo by 50 basis points in April.

However, those actions have been hedged with many caveats. The central bank is clearly still worried about inflationary pressures.

It has done what it could to boost slowing growth. But in the absence of a fiscal backup, it may not do more for a while. Banks have started passing on the cuts.

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The shift in monetary policy creates a potential trading opportunity. It could lead to a rally in the debt market, if RBI dares to follow through with further cuts.

Funds dealing in medium- and long-term debt could see a jump in net asset values, or NAVs, through Q1 and Q2, 2012-13. Bond yields in the treasury market are straightening out though still tight and inverted at some tenures.

There are early signals of a bull run in debt with DIIs buying over Rs 37,000 crore (Rs 370 billion) of debt instruments in April.

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FIIs have also been net buyers. If the debt market does rally, so will the Bank Nifty. Since the Bank Nifty has substantial weight in the Nifty, that could bring some cheer to index investors at least.

Corporate results for FY 2011-12 have been more or less in line with expectations so far. It's difficult to extrapolate, since there isn't a large enough sample of "early birds".

In terms of valuations, there obviously haven't been meaningful changes since prices haven't moved.

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The rate cut pulls up "fair value" for Indian equity by a little. But the indices are trading well above fair value anyway.

Most analysts expected Q4 to be lukewarm since margins pressures were obvious. But HDFC Bank delivered a positive surprise and so did HCL Technologies. Cairn and Reliance saw expected falls.

Infy provided an unpleasant surprise and pessimistic guidance. We'll have to wait for results from Tata Consultancy Services, Wipro and other IT biggies to see if Infy is an outlier or if this is an industry-wide trend.

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Traders find it most difficult to make money during periods like this when the market is range trading without a clear trend.

You have to wait for a breakout and it's often difficult to judge direction. As and when there is a breakout, however, the chances are, the Nifty will move five to seven per cent in a matter of 10 sessions or even less.

The levels to watch over the next few weeks can be defined. On the downside, a drop below the 5100-5150 range would signal a fall till around the 4900-mark.

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On the upside, if the market crosses 5450, it could run up till it hits resistance at 5625-5650.

There isn't much liquidity in the domestic system despite the rate cut. The availability of external liquidity will depend on several different factors, which are incalculable.

The FII attitude and willingness to invest in India will depend on GAAR clarifications and the attitude of the European Central Bank, among other things. Since market direction will be set by the FII attitude, we'll just to wait and watch.