Last week was a week of disappointments. First, the Reserve Bank of India (RBI) disappointed industry by ignoring its demand for lower interest rates. Banks were also disappointed with hike in the cash reserve ratio (CRR). US Federal Reserve chairman Ben Bernanke also disappointed by taking a neutral stand on interest rates, after a 25 basis points cut that was in line with market expectations. And the disappointment over the ongoing turmoil in the credit markets turned into shock after seeing the size of write-offs by Merrill Lynch and Citigroup Inc.
But there was a silver lining, too. The neutral stand taken by the Fed chief will likely have a positive impact on the dollar, which is weakening consistently, and this may be good news for India’s technology stocks. Positive US data, including a 3.9% growth in the US economy during the third quarter and an unexpected rise of 166,000 in October non-farm payrolls announced on Friday, hinted clearly that the US economy, for now, is weathering problems in the housing and credit markets.
However, I think it is time to start getting cautious. There is no need to hit the panic button as the overall uptrend is still intact. The main reason behind my thinking is that the best has already passed by as far as short-term global and domestic indicators are concerned, which include key announcements on the economic front and key earnings. So there are no big, obvious triggers in the pipeline. However, since the liquidity flow into Indian markets is strong, sharp falls are not very likely even as some consolidation can’t be ruled out. I expect international factors such as crude prices and new US data will play a key role this week.
This week in the US, the Institute for Supply Management will report on the service sector of the economy on Monday. The group’s index of October activity is expected to fall to 54.0 from 54.8 in September. However, on Friday, the US commerce department reports on international trade for September. The monthly deficit is expected to rise to $58.5 billion from $57.6 billion in August. Also importantly, factors influencing the dollar will include policy meetings by the European Central Bank (ECB) and the Bank of England (BoE), with both decisions on interest rates expected on Thursday. ECB and BoE are both expected to keep existing rates on hold though investors are watching ECB for any sign of a rate hike in December. And Bernanke testifies before the joint economic committee of the US Congress on Thursday.
Back home, sentiments would remain upbeat in a holiday-shortened week, due to Diwali on Friday. The markets are likely to gain on selective bargain buying by funds and traders, though general profit-selling in the market cannot be ruled out.
Bank stocks will continue to do better than the general market in the initial part of the week. Technology stocks may also gain if the dollar shows some strength and the rupee gives up some of its recent gains. This looks likely in the short term as foreign fund flows have come down after market regulator Securities and Exchange Board of India’s (Sebi) directives on participatory notes used by some overseas investors to gain exposure to Indian shares.
In terms of support and resistance levels, the Sensex is likely to find resistance at 20,143 points. This is a key resistance level, so if the Sensex closes above this level with good volumes, then I would not be so cautionary, as the Sensex will then rally and find its next resistance at 20,526 to 20,564 points, which is a moderately strong level. Above that, the next (and strong) level is placed at 20,823 points. On its way down, the Sensex is likely to find support at 19,427 points, which is a strong support level. If this support is breached, then the market will find its next support only around 18,903 points.
This week, on our technical charts, Allahabad Bank Ltd, Punjab National Bank Ltd (PNB) and Alstom Projects Ltd look good. Allahabad Bank, at its last close of Rs103 a share, has the potential to move up to Rs114 with a stop-loss of Rs94. PNB, at its last close of Rs541.50 a share, has a short-term target of Rs569 with a stop-loss of Rs522. While Alstom, at Rs923, has targets of Rs958, Rs972, Rs1,008 and Rs1,048 a share, with a stop-loss of Rs880.
From our last week’s recommendations, Oil and Natural Gas Corp. gained as much as Rs230, or 19.2%, during the week, which was well above our target. PNB touched a high of Rs555, a little lower than our target of Rs562, while ACC Ltd triggered it stop-loss.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at email@example.com