Amid volatility, last week closed on a weak note with key Indian indices falling on profit selling tracking global cues. Subprime contagion and soaring crude prices led to the fall, as global economies have started feeling the heat of this. The issue of subprime contagion tripped the buoyant trend as investors felt that the US hasn’t seen the last of bad news. After the Caterpillar Inc.’s warning on the contagion effect on US economy sometime back, Cisco Systems Inc.’s statement that its business has seen a significant decrease in orders from banks, heightened concerns about credit problems spreading throughout the economy, and led to a fresh fall. Other US companies have also disappointed with their quarterly numbers citing the subprime effect.
Back home, since the market lacked fresh triggers, all eyes were set on US markets for more cues. But poor sentiments in the US economy only made the situation worse for India, which was awaiting a well-deserved technical correction. However, as mentioned in the last column, the technical correction did not create any panic as mid-cap and small-cap stocks witnessed bargain buying, which gave the markets some cushion. But as expected, frontline stocks fell on profit selling.
This week, the markets are likely to consolidate the continuing trend of the last week. However, this week too, data being released in the US will dominate sentiments. This week too, there are major cues expected from the Indian economy. On Monday, Hong Kong may lead the fall with the US Veterans Day holiday dampening turnover. Japan may also extend its fall but could start consolidating soon. Indian bourses are likely to move in sync with the global markets, but selective buying will continue. The markets will wait for key US data due later in the week. This week, US data on consumer price index (CPI) and producer price index (PPI) will hold the key to the market movement. The CBOE Volatility Index shows that volatility is likely to continue on US bourses.
Key data that will be released this week in the US include monthly data from the commerce department on Wednesday; the US Producer Price Index for October from the labour department, also due on Wednesday (this is likely to show a rise of 0.3% in overall PPI and a 0.2% gain in core PPI); and labour department data on consumer prices in October, which is due on Thursday (this is also expected to rise 0.3%, while core CPI is forecast to gain 0.2%).
These data will be significant for the market as they may give some clue about the possible direction the Federal Reserve will take at its forthcoming meeting in December. If inflation remains under control, then it may give the Fed a chance to go for further reduction in interest rates to shore up the economy and consequently, the global markets. Data related to previously owned homes sales for September will be released on Tuesday and industrial production for October on Friday.
Wal-Mart Stores Inc. and Home Depot Inc. will report their results on Tuesday. Any positive surprises by them could trigger a relief rally.
As far as investment strategy for the week is concerned, investors would do well to adopt a cautious approach and should target mid-cap and beaten down frontline stocks (when they fall). The current fall on bourses is a technical correction and markets may bounce back after some more consolidation. The Sensex, on its way up, is likely to face its first resistance at 19,100 points, following which the next resistance is placed at 19,515 points. If the Sensex closes above this level, then the trend on bourses will change and the correction will end, as the next level of resistance will come up at 19,989 points. On its way down, the Sensex is likely to face its first support at 18,540, following which the next support is placed at 18,289 points and there is rock bottom support at 17,892 points.
This week, on our technical radar are stocks such as ABB Ltd, Reliance Energy Ltd and Bharat Earth Movers Ltd (BEML). ABB, at its last close of Rs1,572, has the potential to move up to Rs1,622 with a stop loss of Rs1,533. Reliance Energy, at its last close of Rs1,838, has a target of Rs1,894 and a stop loss of Rs1,773. While BEML, at its last close of Rs1,574, has a target of Rs1,618 and a stop loss of Rs1,527. From our last week’s recommendations, Punjab National Bank Ltd met its target of Rs569 easily and touched a high of Rs572. Alstom Projects Ltd also hit its first and second targets very easily and hit a high of Rs990.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org