The year 2008 dawned on bourses with a lot of hope and promise.
Some of the promises were fulfilled instantly in the first week of trading, raising investors’ hopes about what lies ahead, as Indian bourses touched their all-time high, supported by good trading volumes. Broad-based gains on bourses and active retail participation were other key factors, which cheered market sentiments.
All through this journey of key indices to new highs, there was little global support. Neither global bourses nor global cues added to this Indian rally. Indeed, Friday’s US employment data showed non-farm payrolls well below expectations, underscoring weak job growth and rising unemployment in December. This led to near panic-selling on US bourses on Friday as the Dow Jones Industrial Average fell 256.54 points, or 1.96%, to 12,800.18. The benchmark Standard & Poor’s 500 Index declined 35.53 points, or 2.46% to 1,411.63. The Nasdaq Composite Index tumbled 98.03 points, or 3.77%. After Friday’s fall, the Dow Jones industrial average is off 3.5% so far in 2008, its worst three-day start of a year since 1932 during the Depression. Now, this is certainly going to send a shiver down the spine of Asian bourses on Monday, when they resume trading. Taiwan, Hong Kong and South Korea are likely to register a sharp fall. India, too, will be hammered by the pressure of global bourses and investors could see some knee-jerk reaction initially.
However, the pressure on Indian equities will not be as high as on the other Asian bourses. Though prices of ADR (American depository receipts) of Indian companies, which represent ownership in the shares of a foreign company trading on US financial markets, were down sharply, I think the markets would start stabilizing and so there should be no reason for panic among investors.
The Indian case is much stronger, as compared with its Asian peers and other global peers, because the Indian economy is in good shape, with inflation well under control and interest rates high. The recent remarks of the finance minister on interest rates would also go down well with the market as markets will now start discounting the lower interest rates, which would be a good sign for not just banks but also for other industries, which are interest rates sensitive. However, as of now, this will work as shock absorber and not as a trigger to buy.
A downtrend on Indian bourses is also not likely to intensify much as the fiscal third quarter earnings results season is round the corner and data is expected to start pouring in from this week itself. Since the general perception is that the results would be good this time, it will temper any tendency towards a sharp fall on various bourses.
Moreover, globally, there is not much negative news in store. No big data from the US is expected this week and the results from companies there are also very limited. However, global markets will keep an eagle eye on a speech by US Fed chairman Ben Bernanke on Thursday for his views on interest rates. Bernanke is scheduled to speak in Washington on financial markets, the economic outlook and monetary policy.
It is widely expected now that despite rising inflation the Fed chief may have to cut the interest rate further to check recessionary fears. In a way, analysts are seeing the current turmoil as a perfect case of further rate cut and everyone will try to read between the lines from Bernanke’s speech.
Other than Bernanke’s speech, November pending US home sales data on Tuesday will also be watched carefully, and is expected to show a 0.5% decline. Consumer credit report on Wednesday for November, which will give insight into American consumer spending, will also be under the lens.
This week, the weekly US jobless claims report on Thursday will also be watched carefully as jobless claims above 400,000 will be considered very negative for the markets.
Back home, the earnings season will begin with the third quarter results of Infosys Technologies Ltd, which are scheduled on 11 January. These results, unlike previous occasions, may not have so much impact if the results do not come up to market expectations as a lot has already been discounted. However, any positive guidance could boost the sentiments on bourses.
Technically, the market was strong but since the US effect will overshadow everything initially, the fall on bourses in the beginning of the week is most likely. On its way down, the markets will find the first support at 20,367 points, but this is a minor support level and, below this, the next support level is likely to come primarily at 20,077 points. This is a crucial support level and a fall below this level with good volumes could mean more declines, which could take the Sensex to 19,762 points. On its way up, the Sensex would test its first resistance at 20,782 points, following which the next resistance is likely to come up at 20,972 points. If the Sensex closes above this level with good volumes, then it could scale levels of 21,238 points.
This week, on our technical radar are stocks such as ABB Ltd, Deccan Aviation Ltd and Hindalco Industries Ltd. ABB, at its last close of Rs1,508.55 a share, has a target of Rs1,548, with a stop loss of Rs1,462.
Deccan Aviation, at its current market price of Rs280 a share, has a target of Rs296, with a stop loss of Rs267.
Hindalco, at its last close of Rs219.95 a share, has a target of Rs232, with a stop loss of Rs203. However, since this week the markets are likely to resume on a negative note, so readers might want to wait for market to stablize before taking any call on this data.
From our last week’s recommendation, Grasim Industries Ltd touched a high of Rs3,825 a share, which was well above its target of Rs 3,699. Bongaigaon Refineries Ltd hit a high of Rs109.5 a share but missed its target of Rs111 by a whisker. But IDBI Ltd gained as much as 10% and touched a high of Rs180.5 a share well above its target of Rs172.
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