In a recent column, I wrote about global stock markets using an old saying: It is often darkest before dawn.
It appears to be now that after a long dark night for stock markets, the day is indeed about to break. There was a hint of it last week and, taking into account all the developments in the US economy, it does appear that we have left the worst behind.
To begin with, the takeover of Bear Stearns Companies Inc. by JPMorgan Chase and Co. restricted the damage to the credit markets from further losses. Then there was the emergency discount rate cut by the US Federal Reserve followed by, on Tuesday, a cut in interest rates by three-quarters of a percentage point, the sixth time in a row. This brought the Fed funds rate target for overnight bank loans to 2.25%.
The US Fed also allowed securities firms to borrow directly from it, through the discount window, which is normally reserved for commercial banks. This means that any US bank that needs cash can go directly to the Fed window and exchange all kinds of collateral, such as mortgage bonds, for highly liquid government securities. This kind of increased liquidity can boost balance sheets depleted by the plunge in prices of mortgage-backed securities and other risky investments.
And, in yet another aggressive liquidity action, the US regulator of Fannie Mae and Freddie Mac, the biggest lenders for US residential mortgages, relaxed its capital rules, giving both permission to pump $200 billion (Rs8.12 trillion) more into the struggling American mortgage market. This move would give Fannie Mae and Freddie Mac a bigger role in the mortgage market, which could help ease a credit crunch and stabilize the American housing market.
Other than the Fed’s actions, the results of Goldman Sachs and Lehman Brothers also boosted investor sentiment as they were better then market expectations, adding to hopes that the worst might be over for credit markets.
Adding to the comfort of the equity markets also was a string of positive sentiments from a falling crude oil prices to easing of gold prices. Then there was the somewhat strengthening of the US dollar that also helped equities firm up. While falling crude prices eased fears of pressure on inflation due to soaring energy prices, the dollar gave some hopes of recovery in US economy. The dollar index, which pegs the US dollar against a basket of major currencies moved up from a low of 70.7 to a high of 72.92, showing that the dollar has gained strength for the first time after 7 February.
So, in a nutshell, last week was a good one for the holidays-shortened markets globally.
In India, there wasn’t much to anticipate as the markets were open for only three trading days during the week, which meant global cues were more or less driving Indian equities. The most noticeable aspect of trading on the Indian bourses was selective bargain hunting though, on an aggregate basis, a note of caution prevailed from the absence of triggers.
This week, the domestic markets will continue to follow global cues and are likely to post gains, at least initially, as the US stock markets are most likely to extend their rally that began last week.
There is also likely to be some pre-results buying into some bluechips ahead of the fiscal fourth quarter results in April. Going by trends in advance tax payments, it appears likely that Indian companies will post, on the aggregate, a strong earnings quarter, despite a slowing economy. As fourth quarter and annual results are not yet factored in by the market, which has been preoccupied with global cues, the chances of a market recovery from current levels are pretty bright.
Moreover, this week, derivative contracts for the month of March will expire on Thursday, which might also trigger short covering on the bourses, though some volatility cannot be ruled out.
So, it appears that the markets are now looking for a bottom in the near term and are likely to witness a rally, with a new trend emerging if stocks witness substantial buying.
Technically also, the markets are searching for a bottom. On its way south, the Bombay Stock Exchange’s benchmark Sensex may find strong support at 14,433 points. But, interestingly, any fall below this level will not be as dramatic as in the recent past with gradual falls more likely, if that.
The Sensex will have a solid support at 13,821 points.
On its way up, the Sensex would find its first resistance at 15,293 points, which will be an important resistance level. If the Sensex closes above this level with high-rising volumes, then this might be the first sign of a trend reversal on Indian bourses as the Sensex would then be poised to touch much higher levels, as the next resistance level would come only at 15,682 points. If this level is also breached, then the next resistance level would come at 15,958 points, followed by 16,197 and then 16,679 points.
Technically, this week, Larsen and Toubro Ltd (L&T), Punjab National Bank (PNB) and HDFC Bank Ltd look good on charts. L&T, at its last close of Rs2,841 a share, has a short-term target of Rs2,920 with a stop loss of Rs2,766. PNB, at its last close of Rs461.50 a share, has a short-term target of Rs486 with a stop-loss of Rs444. And HDFC Bank, at its current market price of Rs1,272.60 a share, has a short-term target of Rs1,312 with a stop loss of Rs1,231.
From our last week’s recommendations, Sterlite Industries Ltd touched a high of Rs770 a share but triggered its stop-loss. Steel Authority of India Ltd touched a high of Rs202.70 a share and still qualifies as a sound recommendation for this week with the previous week’s target. GMR Infrastructure Ltd touched a high of Rs148 a share against the target of Rs166, but triggered its stop-loss.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org