After the gravity-defying climb to 19000 and above, the Sensex has come under pressure. What are the possible scenarios that may play out in the near future and what can investors do now? By Vivek Sharma

US Fed might have actually meant what it said: When the US Fed dropped its target Fed rate by 50 percentage points, it said risks to sustained economic expansion have increased after the credit market troubles. Of course, stock markets didn''t believe the environment is that troublesome and treated the rate cut as a welcome gift.

What if the Fed was on the ball and not over-reacting? In other words, what if the threat of a US economic recession is quite real and warranted a sharp cut last time? Of course, the Fed will cut rates again and markets will continue to party.

But, for how long? Until realisation dawns that rate cuts alone may not avoid a recession. Corporate earnings will take a hit and valuations will suddenly look very expensive. Those who argue that US stocks are now cheaper than they were at the height of the last rally will find that they are inexpensive for a reason. The earnings outlook is not all that rosy!

The Fed might have over-reacted: If indeed the Fed was crying wolf and economic conditions are not that bad, then the markets are in for even more trouble. That could mean the Fed will not cut rates as much as the markets expect now. It could also mean higher inflation risks, as commodity and oil prices are at record highs.

Credit markets may see more jitters: In recent weeks, markets have behaved as if the credit market woes were a mere nightmare from which we have all woken up to a bright, pleasant day. Apart from the rescue packages doled out by central banks, major lenders themselves have now formed a ''super fund'' to soak up distress sales of credit derivatives and prevent further trouble. And, suddenly, all is well in this world!

But, pause for a moment and imagine the irony of the situation. Here are a group of people, who messed up big time on their investment bets, who are now borrowing money to buy the potentially dud investments from themselves if others refuse to do so. In other words, they are raising money to buy these complex and illiquid credit derivatives at prices fixed by them and then say they are worth that much. There is something seriously wrong in this arrangement, especially when many seem to have bought into the plan.

Emerging markets may not be the safe havens they are made out to be: The way emerging markets surged in recent weeks, it would seem that global investors expect them to be islands of safety even when ''emerged markets'' slip. But, emerging markets have their own set of problems - which is part of their ''emerging'' identity. This was demonstrated clearly in India last week, when SEBI spooked foreign investors with a googly over the acceptability of PNotes, usually issued by hedge funds. And the trouble with such googlies is that they encourage other players to come up with their own versions. Like the demands for a complete ban on P-Notes from the Left and the BJP.

Similarly in China, much of the recent surge has come after a government proposal to allow domestic investors to bet on overseas markets. The outflow from Chinese investors to other regional markets, especially Hong Kong, could be as high as $80 billion over the next year according to some estimates. But, it is still only a proposal. Many a slip could happen between the cup and the lip!

Corporate earnings may disappoint: Many of the early results from US companies have disappointed, with as many as a quarter of the earnings announced so far coming below market expectations. The worst hit are obviously the banks, as most of them had to take multi-billion dollar hits from credit market losses. If the US housing downturn persists, they may see much more pain in coming quarters. And, if that happens, it will be only a matter of time before other sectors start disappointing.

In India, technology earnings can be expected to remain subdued in the foreseeable future. It was anyway unrealistic to expect these companies to maintain hefty margins forever and now there is this sword over their heads in the form of a climbing rupee. Many investors have betted heavily on infrastructure plays, valuing them even more exorbitantly than tech stocks. But, as the latest results from cement companies prove, high demand and record product prices may not directly translate to the kind of bottom line growth investors expect.

Oil may soar above $100 per barrel: Global economic growth has been surprisingly resilient to high oil prices over the last couple of years. It could be that economic expansion is now less energy-dependent than in the past. China and India, which along with Russia now account for nearly half of global growth according to IMF, have lessened the impact of high energy prices on their economies through higher subsidies. Besides, weaker dollar means high oil prices have not pinched non-US consumers that hard.

But there must be some price point beyond which it will start hurting. As global economic growth looks increasingly more vulnerable to a slowdown, that point may not be that far off.

Oil may correct: Logically, if oil corrects markets should be happy. Ironically, that may be an even worse situation as stocks, especially in emerging markets, could come under pressure. Energy stocks have led the recent surge on expectations of record bottom lines on rising product prices and refining margins.

Will the markets still pay high premiums for Reliance Industries and Reliance Petroleum for their potential future upsides, if oil slips to $60-65 per barrel? Will Petro China, which is now the second most valuable company in the world, continue to attract investor interest when oil corrects?

None of the above: It is still possible that none of the above potential disasters may happen anytime soon. The Fed may be successful in steering the US economy away from a recession, using further rate cuts, even if growth decelerates further. Oil prices may settle around current levels, but lower interest rates may support consumer spending from slipping.

US housing sector may bottom out and even help absorb any potential slack in other segments. Corporate margins may not fall further as global growth refuses to slow down. Emerging economies may continue to lead the global expansion. Most of the ghosts in the credit markets may have already been exorcised and liquidity may continue to flood global markets.

This perfect scenario, which appears rather improbable now, could lead to a sustained up-trend in equity prices. It could also lead to even more investor complacency and exuberance, which usually end in absolute disasters.

Some of the above: A more probable scenario is that some of the above mentioned troubles will hit the market in the short to medium term. That would mean more wild rides for the stock indices, as bouts of frenzied buying will be interspersed by panic selling.

So, what do we do? At the end of the day, if you are a trader, you cannot argue with markets. You have to move with the tide, whether markets are exuberant, panicky or just indifferent. Investors with reasonably long horizons have the luxury of arguing with markets - and surviving to tell the story - entering when markets are panicky and exiting when things get frothy.

It may be a good idea to ''cash some of the chips'', if you have not already done so. If your favourite holding period is ''forever'' or something close to that, none of these matter. Unless, of course, you are a latecomer to the party!