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Market at crossroads with a positive bias

Market at crossroads with a positive bias
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First Published: Sun, Jan 27 2008. 10 57 PM IST
Updated: Sun, Jan 27 2008. 10 57 PM IST
Defying all logic and expectations, the Indian stock markets witnessed one of their worst falls last week on global and domestic concerns. It all started with heavy oversubscription of the Reliance Power initial public offering (IPO). As investors were busy singing paens to the company and the various records it created, the liquidity crunch on the bourses wreaked havoc, triggering a fall which was unimaginable at the beginning of the week.
The fall was aggravated by the turmoil on the global front with talk of the US entering into a recession. Interestingly, the concerns over the US economy led to big falls on stock markets the world over, but US exchanges remained unaffected and the Dow Jones Industrial Average and the S&P 500 index ended the week higher for the first time in five weeks.
As far as India is concerned, the fall was very heavy and sharp. Logically, this was long overdue and indications of some technical correction had started coming in, but this had not happened thanks to a constant flow of positive news. There were smooth rollovers to the next derivative cycles month-over-month and huge open interest in the derivatives segment, but the second was like a ticking bomb. It was fine as long as there was enough liquidity to support it. But once liquidity was squeezed, the huge open interest became a liability and the markets succumbed under its pressure.
Broadly speaking, the fall in Indian markets was just a market phenomenon, and it has just nothing to do with economic fundamentals or valuations. This clearly answers two important questions. The first is, what will happen in the future? The answer is that there is no question mark on the future of the stock market or the bullish trend in the long run. And two: Was it a sign of the beginning of a bear run? Since things are looking up again and there is a lot of money waiting to find its way into the stock market, the question of the bear run does not arise. Moreover, such swings and knee-jerk reactions do not indicate the reversal of the long-term trend. But it is also true that such setbacks may put the markets in a consolidation phase for some time, resulting in some selling when the market hits highs.
The market now seems to be at the crossroads again, though this time it has a positive bias. The big, unscheduled and unexpected cut in interest rates in the US on Tuesday has raised hopes of a further cut at the meeting of the US Federal Reserve on 29-30 January. If the Fed lowers rates further, it will spark a fresh rally on the stock market as this would mean more foreign funds flowing into strong economies such as India. Moreover, since a decision is also expected on domestic interest rates in the forthcoming meeting of the Reserve Bank of India (RBI), there are some positive triggers to look forward to in the coming week.
This week is very critical, particularly for the US, both from the data and quarterly results points of view. Data on new home sales will be released on Monday, while that on durable goods orders and housing prices will be out on Tuesday, and the first look at the economy’s pace, as measured by gross domestic product, in the fourth quarter on Wednesday. According to some estimates, the US economy grew at an annual pace of 1.2% in the fourth quarter, which was much slower than in the third quarter. A report on personal income and spending is due on Thursday and most importantly, the data related to January non-farm payrolls, due on Friday, will be watched very closely. If this data show some positive indications, it might cheer market sentiments. Also on Friday, the Institute for Supply Management’s report on factory activity in January is expected. This data is also very important as the last time it had disappointed the market and aided a fall. Moreover, on Monday, investors across the globe will tune in to the US president on his views of the economy in his annual State of the Union address.
Back home, investors will wait for the RBI governor’s views on monetary policy. Though a 25 basis point cut in the cash reserve ratio looks most likely, it is not yet been fully factored in by the market. So, any announcement related to a cut in domestic interest rates might trigger a rally. Moreover, the corporate results, which have been well over expectations so far this season, may also boost sentiments. But volatility may continue due to the expiry of derivative contracts for January on Thursday. Though a lot of positions have been pared in the recent sell-off, if the rollover of contracts to the next cycle remains smooth, it may add to positive sentiments.
Technically, this week, the market is showing signs of more gains now, and as long as the Bombay Stock Exchange’s Sensex is above 18,184 points, there is nothing to worry about. On its way up, the index is likely to face its first major resistance at 19,168 points; before this level, there could be moderate resistance at 18,665 and 18,916. If the major resistance level of 19,168 points is cleared, there could be further gains, which may take it upto 19,978. On its way down, the Sensex is likely to witness its first support at 18,184 points, which is crucial as a conclusive fall below this level could signal more losses, which may drag the Sensex down to 17,991 points. If the market falls further, then the next meaningful support will come at 17,452, while there is a rock solid support at 17,168.
Technically, this week shares of Kotak Mahindra Bank Ltd, Bharat Heavy Electricals Ltd (Bhel) and Tata Steel Ltd are looking good on the charts. Kotak Mahindra Bank at its last close of Rs1,087.85 has a short-term target of Rs1,148, with a stop-loss of Rs1,021. Bhel closed at Rs2,165 on Friday, and has a target Rs2,280 and a stop-loss of Rs2,077. Tata Steel has a potential to touch a target of Rs750 from its last closing price of Rs714.10, with a stop-loss of Rs679.
From our last week’s recommendations, HDFC Ltd, ABB Ltd and Hindalco Ltd all triggered their stop-loss due to the crash on the bourses. However, all the three stocks witnessed sharp recovery by the close of the week.
Vipul Verma is a Delhi-based investment adviser. Your comments, questionsand reactions to this column are welcome at ticker@livemint.com
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First Published: Sun, Jan 27 2008. 10 57 PM IST