Does 30,000 on the Sensex really matter?

30,000 is a nice round number. The BSE exchange’s benchmark index, the Sensex, closed above this level for the first time in history last week. There have been calls for celebration and caution at the same time.

Is this a significant milestone? If you look at the previous two 10,000-point milestones on the index, I don’t remember Mt 10,000 as much as I recall 20,000. The latter peak is etched in memory because of the euphoria it came with and painful fall that followed. One needs to google to find 10,000 was crossed sometime in February 2006. Though a big event at the time, the index would rush past so many milestones in the next two years that 10,000 has faded in public memory.

Which of its two predecessors is the third 10,000 to follow? Maybe what happens in these weeks and months after 30,000 would determine the significance of the landmark.

Seasoned investors do not care as much about the milestone as the journey itself. “I am not a big believer in the notion of the socalled ‘psychological barrier’, says Seth Freeman, a California-based investor, who runs EM Capital Management LLC. He says “There might be retail (individual) investors trying to chase share prices that respond to this idea. Certainly, it plays into the strategies of momentum investors. For us, it’s a relative number and one that needs to be decomposed to understand the underlying index constituents, the sectors and industries.”

The index, sold to beginners as a barometer of the economy, is often driven by a small number of companies or sectors. Changes in sentiment on only a few key sectors, say, banking or information technology, can impact the Sensex disproportionately.

Deepak Mohoni, the Pune-based chartist who is credited with coining the term, Sensex, feels the significance of these levels are overestimated. “The only thing that matters is the trend,” he says. THis, he adds, seems much better than when the index first hit 20,000. He recalls how a number of economic troubles were being then brushed under the carpet. “There were several stocks falling. Not this time.”

Some milestones, investors remember, are not often clean round numbers. Freeman remembers a Wall Street Journal report from December 2004, when the Sensex hit the then all-time high of 6,328. It called for a breather, quoting analysts who felt valuations had far outrun earnings. He explains how the Indian market is now almost five times higher than the high in early December 2004, a little over 12 years. Quite a journey, considering that it had to overcome several domestic shocks — Satyam Computer scandal, National Spot Exchange crisis — and the debilitating effects of the global financial crisis.

Mohoni derives comfort from the fact that the index topped 30,000 after three-four attempts over recent years, making this a base for a “standard bull market.” Freeman also feels the index has a lot of steam left and is still in an early “post warm-up phase”. He believes the next 10 years will significantly out-perform, with the absent exogenous factors of the past 12 years. “Lack of inclusion might be the single biggest risk,” he feels.

Though they underplay its significance, even investors like Freeman do not mind the hype around 30,000, as it might help woo new foreign investors or those with relatively low exposure to India. “The PR might help increase flows into the Indian market and also into foreign direct investment like infrastructure and other long-term investments,” thinks Freeman.

So, don’t worry; 31,000 is just round the corner. Or will the Nifty on the National Stock Exchange hit 10,000 first?