We are clearly riding on a liquidity wave. There is no significant change in the economic fundamentals of India, but immense liquidity has driven key indices higher.
Does this mean the Sensex rally will simply continue? The clear answer is no. Liquidity-driven rallies have hit bourses before also, but since this was the sharpest rally ever, it raises equally sharp concerns.
The most logical move now is to wait and I will sound a large note of caution. First, there is critical data due in US, which will be very significant for the markets the world over. Second, the second quarter results are round the corner.
Ahead of the Ticker: Vipul Verma
We have so far discounted the good, and any bad patches associated with these numbers may actually trigger heavy selling on bourses.
You will notice that excessive liquidity will disappear suddenly. The worst-hit in such a situation will be the day traders and small investors.US data
In the US, monthly payroll data is the most important number to watch for this week, due on Friday. If this data comes weaker than expected or it shows continuation of its last trend, then it might create ripples on bourses as this would mean that the US economy is headed for recession.
However, if this data is stronger, then it might give Federal Reserve some relief and it may not lower interest rates further in its 30 October meeting. Meanwhile, the recent rally on global bourses is more due to the hopes that the rates would be cut further by the Fed.
Logically, this means that the outcome of payroll data will, most likely, lead to a fall on US markets followed by global bourses, unless it is completely muted.
Other significant data in US this week include a pair of reports on the economy from the Institute for Supply Management on Monday. The ISM report on the service sector of the economy on Wednesday. While US car and truck sales for September and pending home sales for August, will be released on Tuesday, followed by Thursday’s reports on August factory orders and revised figures on durable goods orders.
Meanwhile, the dollar has weakened further and the dollar index, which pegs the greeenback against the basket of major currencies of the world, has fallen to historically low levels. To add to it, rising crude prices, which hit their record high yet again last week, will likely take their toll on the US economy sooner than later.
Back home, investors now need to focus on the overall breadth of the market and volumes. At this point of time it will be the most important indicator, which will tell investors when will the market fall.
Since we are in uncharted territory, so the resistance levels are based on certain assumptions.
However, the study of rising and falling volumes along with the breadth of the market can possibly give investors necessary clue about trend reversal on bourses. If the falling volumes outpace the rising volumes and the breadth of the market is considerably negative, then this could be considered as a negative signal.
In terms of supports and resistance, the rising Sensex is likely to face resistance at 17,356 points, following which the next resistance will come at 17,581. If this resistance is also broken, then the Sensex may gain further and touch 17,832 points.
On the downside, the Sensex is likely to face its first support at 17,193 points, a close below this level with significant volumes will mean further fall and Sensex may then test 16,982 points. However, if the Sensex falls further then it may find the next support at 16,378 points.
This week Bajaj Auto Ltd and Kotak Mahindra Bank Ltd look good on the technical charts. Bajaj Auto, at its last close of Rs2,538, is likely to hit a target of Rs2,610 with a stop loss of Rs2,488. Kotak Mahindra, at its last close of Rs922, has a potential to touch a target of Rs949 with a stop loss of Rs896.
From our last week’s recommendations, Tata Consultancy Services Ltd hit its target of Rs1,058 comfortably and touched a high of Rs1,080 on NSE. Jet Airways Ltd, recommended at Rs902 touched a high of Rs997.6 during the week, gaining 10.6% for the week. Videsh Sanchar Nigam Ltd touched a high of Rs460, which was well above its target of Rs440.
Vipul Verma is a New Delhi-based independent investment adviser. Your email comments and questions are welcome at firstname.lastname@example.org