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After rate cut, markets look at key US economic data

After rate cut, markets look at key US economic data
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First Published: Mon, Sep 24 2007. 01 04 AM IST
Updated: Mon, Sep 24 2007. 01 04 AM IST
Finally, the suspense got over and the markets across the globe rallied after the US Federal Reserve Bank cut its benchmark Fed funds rate to 4.75% to help cushion the sagging American economy.
The Fed was quite successful in creating ripples in the stock market, but whether it will be a long-term phenomenon and whether it will actually benefit the world’s largest economy remains to be seen.
The rally on Indian bourses, following the Fed rate cut, made big headlines on television and in print. But that was only one side of the coin. We were so overwhelmed by the numbers that everyone largely ignored the fact that on the day when the Bombay Stock Exchange’s benchmark Sensex rallied 653.63 points, the advance-decline ratio was barely 1.24. In other words, of the 2,795 stocks traded on BSE, 1,510 stocks gained while 1,216 stocks actually fell. Some 69 stocks remained unchanged.
To me, this was a record of sorts and what we saw on Wednesday was probably the weakest rally ever, if we take into account the breadth of the market in addition to the obvious gains. For investors, this is an important data point. And the story doesn’t end here, as the breadth of the market, ever since this rally, has also been negative.
The nature of the rally, which is focused around a few liquid stocks, quite justifiably reflects the fact that either hedge funds are at play in boosting the overall market or it is simply euphoria. Some observers may call it operator-driven. I don’t mean to underplay the economic credentials of India, which remain as firm as ever. Reports of higher tax collections underscore this. However, daily movements of stock markets cannot be linked primarily to the economy. Experience suggests that the hedge fund play leads to extreme volatility and can trip the market without giving prior signals, leaving most time investors napping. So this is a time to tread cautiously.
This week, the data from US will again be in focus as the euphoria over the Fed action wanes. Key US economic indicators such as home sales, consumer confidence, durable goods orders, a final reading on second-quarter American gross domestic product and the latest monthly report on personal income will dominate the sentiments and will give necessary clues about the future movement on the stock markets. On Tuesday, September US consumer confidence readings from the Conference Board will be watched carefully especially after payrolls data for last month showed the first negative trend in more than four years. Any sharp fall in this number will actually be seen a big negative. The data related to US housing market will be another key data to watch out for. Tuesday’s August existing home sales data will be followed by new home sales on Thursday. Both reports are expected to show a slowdown in sales. Back in India, the Sensex is placed in an overbought territory and is likely to witness resistance in the region of 16,733-16,746 points. This will be a key resistance to watch and, if this level is breached, then the Sensex may touch 16,868, which is a very strong resistance. On the down side, the Sensex is likely to witness support at 16,397 points. However, if the Sensex goes below this level, then the next key support level will likely only come at 15,900 points, which will be a strong support level.
Technically speaking, this week I have picked up defensive stocks keeping in mind the fact that markets may see a correction depending on the global cues. Stocks such as Tata Consultancy Services Ltd (TCS), Videsh Sanchar Nigam Ltd and Jet Airways Ltd look promising at current levels. TCS, at its last close of Rs1,014, has the potential to move up to Rs1,058 with a stop-loss of Rs982. VSNL, at its last close of Rs422.50, now has upward momentum, which, though limited, can take the stock to Rs440. The stop-loss for VSNL will be at Rs399. Jet is in a consolidation phase and from its last close of Rs902, may touch levels of Rs946 with a stop-loss of Rs868.
From our last week’s recommendations, Larsen & Toubro Ltd, recommended at Rs2,591, met its target of Rs2,700 very easily and scaled a high of Rs2,810, gaining 8.45% over the week. Maruti Udyog Ltd, recommended at Rs869, met its target of Rs922 very easily and touched a high of Rs935 during the week. Patel Engineering Ltd, recommended at Rs451, touched a high of Rs475, missing its target of Rs481 by a whisker.
Vipul Verma is a Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, Sep 24 2007. 01 04 AM IST