Defying all odds, the Indian stock markets resumed their upward trend and scaled yet another peak on aggressive buying by funds and traders. Last week was very critical due to the decision of stock market regulator Securities and Exchange Board of India (Sebi) on participatory notes (PNs) and expiry of derivative contracts for October. However, after initial volatility, equities bounced back, seemingly ignoring all concerns over liquidity inflows. With smooth rollover of derivative contracts to their next cycle and a bumper earnings season, the Sensex may well celebrate Diwali around 20,000 points.
Since the domestic markets have crossed all major hurdles, one can hope for good times on the bourses. Moreover, the Reserve Bank of India’s mid-term review of credit policy and a key US Federal Reserve meeting scheduled for 30-31 October will likely boost the markets further. It is widely expected that the Fed will cut rates by 25 basis points, especially after the poor performance of financial firms tied to the subprime mortgages and related securities. Poor “existing housing” sales makes a strong case for a rate cut in the US. Trading in November Fed funds futures shows that a 25-basis point cut in the benchmark rate to 4.5% is fully factored in, with only a small chance that there will be a bigger cut to 4.25%.
As far as Indian markets are concerned, this would certainly be a matter to rejoice. Although it is already factored in, this move will boost markets here further because it will only improve foreign fund inflows. The meeting of the Reserve Bank of India (RBI) is vital for Indian markets, as there are no clear signals from it as of now. However, no matter what RBI decides, it is likely to boost stock markets. RBI has limited choices: if it opts to raise the cash reserve ratio by 25 basis points, it will be able to mop up excess liquidity from the system, but the rupee could strengthen further, which may further boost foreign funds inflows.
If RBI keeps rates unchanged and the Fed opts for a cut, then the inflow of funds may gain further momentum due to interest rate differentials between the two countries. And if RBI obliges industry and cuts the interest rate, then it will trigger another round of rally on the bourses. But there are some obstacles in way of the rally. Crude oil prices closed above $92 (Rs3,634) a barrel on Nymex, which is a very big concern for global economies. This will have a deep impact on US bourses facing recessionary pressures. The Indian economy will also feel the heat some time down the line despite a strong rupee. Moreover, the weakness of the dollar against the basket of major currencies is a very big concern too for global economies. Above all, the subprime mortgage crisis is still far from over and Merrill Lynch & Co.’s shocking $8.4 billion write-down, resulting in the biggest quarterly loss in the firm’s history bears testimony to this fact. So, clearly there are several big issues looming large. However, despite these threats the markets this week are likely to post gains.
Technically, the Sensex is now headed north and on its way up, it is likely to face first resistance at 19,423-19,467 points. This is a minor resistance level and is likely to be broken soon; the next resistance is likely to come at 19,744, which is a key resistance level. If the Sensex closes above this level, then 20,000 will be a reality very soon. Purely technically, the rally is not likely to stop at 20,000 points and may gain further. On its way down, the Sensex is likely to test its first support at 19,085 points, after which next support will come at 18,798 points, while there will be a deciding support at 18,323 points, which is an important support level in the short term.
This week, Oil and Natural Gas Corp. Ltd (ONGC), ACC Ltd and Punjab National Bank Ltd (PNB) look good on our charts. ONGC, at its last close of Rs1,155, has the potential to touch Rs1,204 with a stop-loss of Rs1,106. ACC at its last close of Rs1,080 has a target of Rs1,130 with a stop-loss of Rs1,053. PNB, at its last close of Rs524, has a target of Rs562 with a stop-loss of Rs499. From our last week’s list, Bharat Electronics Ltd, recommended at Rs1,768, touched a high of Rs2,180, gaining Rs412 or 23.30% during the week. Reliance Communications Ltd, recommended at Rs730, touched a high of Rs775, comfortably meeting our target of Rs765. However, Infosys Technologies Ltd did not move on expected lines and hit its stop-loss.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org