Equities and key indices slipped during the week, taking cues from global indicators. However, while Indian bourses were closed on Friday, US and other global bourses rallied on positive US data. The impact of weekend gains was such that the US ended the week with the Dow rising 0.8%, the S&P gaining 1.2% and the Nasdaq surging 2.1% for the week, while the key Sensex index of the Bombay Stock Exchange fell 867.43 points for the week.
It looks like India and other Asian bourses could greet this week with gains. Since the markets will be closed again on Tuesday due to Christmas in what is generally a holiday-mood week on the bourses, it might prevent large investors and funds from increasing their commitments, thus capping any large gains. Still, there would be buying interest due to attractive valuations following the sharp correction last week.
Since this week we also have the expiry of derivative contracts for December on Thursday, and the markets will get only two days of trading before going in for expiry, the impact of expiry-driven trading will supercede any global sentiments.
The rollover of derivative contracts appears quite satisfactory and, as it is expected that the rollover would pick up momentum on Monday, it would mean more gains toward the end of the week.
As far as global cues are concerned, there is not much data to analyze. The first crucial US data will come on Thursday, when the durable goods orders for November will be reported. This is expected to be a positive number and likely to show a moderate rise. But the report on consumer confidence index by the Conference Board is likely to continue with the declining trend. However, on Friday, the data on new home sales for November will be watched very carefully as it could give further cues on the subprime mortgage problem.
A moderate fall in the new home sales is already discounted by the markets and any positive surprise could be a big trigger for bourses.
Over the weeks, another dimension has added to the stock market, which is the London interbank offered rate (Libor). It is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). Libor is slightly higher than the London interbank bid rate (Libid), the rate at which banks are prepared to accept deposits.
This rate moves in sync with US Federal Reserve rates and, normally, the one-month Libor rate is 15-20 basis points above Fed rates. However, after the 11 December cut in interest rates in the US by 25 basis points, the Libor has not come down substantially and remains 60-65 basis points above Fed rates.
One-month, dollar-denominated Libor is a benchmark for many kinds of loans, including adjustable-rate mortgages, so any fall in this rate would be good news for the stock markets.
Back home, markets would continue to remain volatile and, going by charts, the Sensex is likely to test its support now at 18,886 points, following which the next support would be placed at 18,531. If this support also breaks, there would be a crucial support at 18,163 points.
On its way up, the Sensex is likely to find first resistance at 19,291 points, which is a moderate resistance, followed by a strong resistance at 19,396 points, which is a crucial resistance. If this resistance is broken, then there could be sharp upward gains on the bourses, which may take Sensex to 19,856 points, which would be a key resistance level again.
On the upside, the Sensex may see levels like 20,234 points, if the resistance levels mentioned above are broken. Purely technically speaking, the markets are likely to rise this week.
Technically, this week, stocks such as Sterlite Industries Ltd, Reliance Capital Ltd and Bank of Baroda Ltd look good on charts.
Sterlite, at its last close of Rs956.80 a share, has a potential to move up to Rs1,010, with a stop-loss of Rs912. Reliance Capital, at its last close of Rs2,376.95 a share, has a short-term target of Rs2,480, with a stop-loss of Rs2,280. Bank of Baroda, at its current market price of Rs403.90 a share, has a target of Rs429, with a stop-loss of Rs389.
From our last week’s recommendations, Hindustan Zinc Ltd, Steel Authority of India Ltd and Bharat Earth Movers Ltd all failed to achieve their targets and ended lower.
Vipul Verma is a Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org