Sentiments took a U-turn on the bourses—both domestic and global—in the wake of negative news and data that raised fears that the US economy is finally heading into recession. The impact of fears was such that Asian markets, especially India, witnessed a sell-off. Since the beginning of the year, Indian stocks have shown a lot of resilience and remained firm despite a fall on US and other global bourses. However, since the beginning of last week, things have changed, with the situation turning from bad to worse by the time the week ended. By that time, the situation could have been best described by using words such as “gloom” and “despair”.
Last week’s losses were no surprise. Last week’s column said that the markets were showing signs of tiredness and that a fall was inevitable. Thus, the markets fell on expected lines, but Friday’s huge sell-off was certainly well beyond expectations and sent shivers down the spine of small investors and traders. Moreover, in the absence of no market-moving positive news, the situation remains pretty grim.
However, there is a sliver lining—equities have become quite attractive after the correction and should attract the interest of foreign funds sooner than later. There is a general belief in the market that foreign funds are pulling money out of the stock markets, as going by data from stock market regulator Securities and Exchange Board of India (Sebi), they have been net sellers in the last few days. But this looks like a half-truth, as the current round of selling could be more on account of unwinding of participatory notes.
Since all holders of participatory notes could not register themselves as foreign institutional investors, their selling was bound to come at some point, and this looks like it. I do not have data to substantiate the claim, but this is the logical deduction. In light of these facts, one should not hit the panic button yet.
Now for the big question: What next on the bourses?
Purely technically, it looks like that there could be a bounce-back on Monday. The chances of this are quite bright and if the Sensex snaps its five-day losing streak, then the sentiments on the bourses may improve temporarily.
The fact that the US markets will remain closed on Monday on account of a holiday there should actually come as a relief to investors as there will be no major announcements; in the present scenario, no news should be good news.
However, I think the US markets reacted too negatively and hastily to President George W. Bush’s package worth upto $150 billion in tax cuts and other measures to shore up the economy. I think the markets will consolidate a bit, despite the fact that there were not many surprises in the package.
Not too many data releases are expected in the US this week, but corporate results could drive the markets, as frontliners such as Bank of America Corp., Wachovia Corp., Apple Inc., eBay Inc., Microsoft Inc., Motorola Inc., AT&T Inc., United Technologies Corp., ConocoPhillips and Caterpillar Inc. would report their earnings. If these numbers come out well, then it could boost investor sentiment. So far, the performance of US companies has not been as bad as expected, and positive surprises by General Electric Co., International Business Machines Corp., and Advanced Micro Devices Inc. have raised hopes that there could be some more positive surprises in store. However, investors are also likely to be extremely cautious given the debacles at companies such as Citigroup Inc. and Merrill Lynch and Co. Inc. The latest to join this bandwagon was Sprint Nextel Corp., shares of which fell 24.8% to $8.70 after the company reported deeper-than-expected subscriber losses and said that it would cut about 4,000 jobs.
Another crisis which is brewing in the US is the fresh rating downgrade by Fitch of bond insurer Ambac, from triple-A. The cut, the first by one of the top rating agencies on a bond insurer, puts at risk billions of dollars of corporate and municipal bonds covered by the company. Fitch’s downgrade could be followed by a similar one by Moody’s Investors Service. If that were to be the case—and it will likely be—it could dent investor sentiments further in the US and global markets.
Back home, the situation is not as grim as it is reflected on the markets. So far, corporate results have been good, as a good number of companies have fared either in line with or better than market expectations. Moreover, in view of a possible interest rate cut sometime down the line, there is a sense of anticipation on the bourses.
It looks almost certain that the US Federal Reserve will cut the benchmark rate by another 50 basis points either before or at its forthcoming meeting on 29-30 January. That should also work as a booster for the markets here as, unlike the last time, they have not factored in a cut in US interest rates. But looking strictly at the near term, or as close as the beginning of this week, volatility is likely to continue. Technically, there is not much downward potential in the market now and the market should be reaching its bottom shortly. However, since US news and data are driving stock markets around the world, any more negative news could swing the markets temporarily. The Sensex is likely to find good support around 18,512 points and in normal circumstances, the they should bounce back from there.
However, if this level is breached, then you may see the next support coming in at 18,182, followed by a very strong support at 17,867. On its way up, the Sensex is likely to face resistance at 20,013 points; if it crosses this level convincingly or closes above this level with good rising volumes, then there could be a short sharp rally, which could take the Sensex to its next resistance level of 20,498-20,518. If this band is also breached, the next resistance would come at 20,698 and then again at 20,971 points.
This week, technically, HDFC Ltd, ABB Ltd and Hindalco Ltd look good on our charts. HDFC at its last close of Rs2,819.80 has the potential to touch Rs2,900, with a stop-loss of Rs2,739. ABB at its current market price of Rs1,364 has the potential to touch Rs1,403, with a stop loss of Rs1,322.
And Hindalco Industries, which last closed at Rs184, may touch a target of Rs198, with a stop-loss of Rs173. However, in view of the impending volatility and the ongoing downtrend on the bourses, investors should wait for markets to stablise before taking a fresh call.
From our last week’s recommendations, Oil & Natural Gas Corp. Ltd touched a high of Rs1,312 but missed its target of Rs1,343. Tata Steel Ltd touched a high of Rs873, and also missed its target of Rs898. But HDFC Bank Ltd, recommended at Rs1,762.35, touched a high of Rs1,825, which was comfortably above its target of Rs1,810.
Vipul Verma is a New Delhi-based investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org