Last week, the bourses were characterized by gloom and despair as they struggled to find support in a sea of negative cues. Sentiments remained depressed, as there was no positive clue to look forward to and the admission by the US Federal Reserve chairman of the fact that the US economy might be in recession only made matters worse. Interestingly though, the US markets ended the week with handsome gains with the S&P 500 gaining 4.2%, the Dow 3.2% and the Nasdaq 4.9%, its biggest weekly advance since August 2006.
However, the scenario on Indian bourses deteriorated with inflation touching 7%, its highest in three years. The number, which was above expectations, was actually not a surprise as it was anticipated that inflation had not seen its peak yet and that the government’s efforts to reduce it would take some time.
Ideally, these measures should start reflecting in the numbers from this week onwards, but the rain god’s ire could make the situation worse as the wheat crop has been damaged by up to 35% in some areas due to untimely rains—the average damage is around 20% in northern India. This could add to the misery of the stock markets in time to come as agriculture has been underperforming among the various constituents of the economy.
On the domestic front, the going is getting tough as the markets are now bracing themselves for monetary tightening measures following the surge in inflation. Decisions related to monetary tightening could come this week, which might further impact market sentiments depending on the extent of tightening. However, I feel that the markets might witness a knee-jerk reaction initially based on these measures, but will soon bounce back as the worse is getting discounted with every passing day.
Going forward, the markets will now look forward to some positive surprises from the earnings season. The beginning of the earnings season was on a disappointing note, as key index constituent, the state-run Bharat Heavy Electricals Ltd (Bhel) reported a profit below forecast for the year ended March 2008 on Thursday. Leading broking firms lowered their profit estimates for Bhel for 2008-09 and 2009-10, which only added to the woes of the stock market. However, all eyes will be on the leading lights of the Indian corporate world such as Infosys Technologies Ltd, Tata Consultancy Services Ltd, Wipro Ltd, Reliance Industries Ltd, State Bank of India, Reliance Energy Ltd, Hindustan Unilever Ltd, Oil and Natural Gas Corp Ltd, Tata Steel Ltd, DLF Ltd, GMR Infrastructure Ltd, ICICI Bank Ltd, HDFC Bank Ltd, and HDFC Ltd. If the results spring up any positive surprises, then it could end the misery of investors. Still, many of these results are not expected till next week.
Globally too, the focus will shift to corporate earnings, which could provide the next trigger for markets. Issues related to the credit crisis and housing have now been discounted to a large extent and the fact that investors are looking for bargains proves this point.
Friday’s 3.5% rise in the stock of Google Inc. was a clear indication that investors have started hunting for bargains as the stock led gains on the Nasdaq following a 32% sell-off since the beginning of the year.
Last week’s strong demand for a Lehman Brothers share offering further proves the point that value has started emerging from the chaos, which is a good sign for global bourses. If the earnings, the estimates for which are being downgraded, substantially surprise the market, then there will be a sudden change of sentiments on bourses.
In the US, the earnings season will be flagged off by Aluminium producer Alcoa Inc. which will declare results after the closing bell on Monday. And conglomerate General Electric Co. will cap off the week, delivering its earnings on Friday. During the week, other major companies such as No. 2 consumer electronics chain Circuit City Stores Inc., and home goods retailer Bed Bath & Beyond Inc. will report earnings on Wednesday. Drug store chain Rite Aid will announce its results on Thursday.
Among critical US data expected next week, the National Association of Realtors reports February pending home sales data on Tuesday while the government reports the February trade balance on Thursday.
Data related to retail sales in the month of March will also be in focus as this will throw light on consumer spending, which is understood to be falling. On Thursday, several prominent retailers in US, including Target Corp, Kohl’s Corp. and Gap Inc. will report their monthly sales. The initial numbers are not encouraging as Dollar Stores Inc. reported a sharp drop in quarterly profit on Friday and cut its full-year earnings forecast due to worsening of economic conditions in the US. If the retail sales of other stores also show a sharp fall, then there will be some trouble on the US bourses, which might get reflected on global bourses too.
In a nutshell, the condition on global bourses continues to remain uncertain and more positive cues are needed to change sentiments despite growing signals that the selling is overdone.
Back home, there is some concern in the market over a hike in CRR (the cash reserve ratio—the balance banks need to keep with the central bank) and a possible hike in interest rates. Unless the suspense over monetary tightening ends, sentiments on bourses will remain depressed. Technically this week, the BSE Sensex is likely to test its first critical resistance at 15,711 points; if the Sensex closes above this level, then the sentiments will improve and the Sensex would aim at 16,005 points. This resistance level will be the most critical one as it could signal a change in trend on bourses. Following this level, the next resistance will come at 16,307 and 16,457 points.
On its way down, the Sensex will test its first support at 15298 points—this, though, is a minor support level may not offer solid support. If it breaks through, the Sensex will fall to 15,061 points.
This is a critical support level and if broken can lead the Sensex lower, and then the Sensex would test its recent low of 14,671 points, or even lower levels like 14,203 in a knee-jerk reaction. However, those will be levels to buy—they will not justify valuations, being too cheap.
This week technically, Bank of Baroda, Bajaj Hindusthan Ltd and Sterlite Industries India Ltd look good on the charts. Bank of Baroda at its last close of Rs269.35 has a target of Rs294 and a stop loss of Rs253. Bajaj Hindusthan Ltd at its last close of Rs189.10 has a target of Rs202 and a stop loss of Rs175. While Sterlite Industries at its current market price of Rs734.20 has a target of Rs762 and a stop loss of Rs717.
From our last week’s recommendations; Bharti Airtel Ltd touched a high of Rs840, but fell short of its target of Rs859. Century Textiles and Industries Ltd touched a high of Rs770 and met its target of Rs768 comfortably.
Tata Tea Ltd touched a high of Rs858 against its target of Rs868 and still remains a valid recommendation with the same target and a stop loss of Rs 806.
Vipul Verma is a New Delhi-based independent investment adviser. Your comments, questions and reactions to this column are welcome at email@example.com