Equities plunged across the globe on bearish signals from the US. Markets in that country witnessed a sell-off on Thursday on signs of further weakness in the housing market and deteriorating conditions for corporate buyouts.
Moreover, lower than expected earnings from Exxon Mobil Corp. also dented sentiment, as more than $16 billion (Rs64,800 crore) were wiped out from the market capitalization of the company. However, the straw that broke the camel’s back was quarterly losses posted by two leading US builders—DR Horton Inc. and Beazer Homes USA. This fanned fears of the subprime mortgage contagion spilling over to other sectors of the economy as well and making credit dearer for industry. Since the current rally in the US was driven by mergers and acquisitions, concerns over difficulties in financing corporate buyouts led to a sell-off on bourses. Concerns over tightening credit conditions continued to depress sentiment, and equities maintained their downtrend on Friday.
The big question is, where are we heading now? Clearly, the cues from the US and Europe are not encouraging, and chances that US markets will resume their northbound journey and head for a new high look bleak. An alternative approach to US stock markets suggests that the worst may be getting over for the US in the short term as other economic indicators of its economy are still strong.
Looking at the valuations, the US markets are back at the levels seen in April, when the Dow Jones was hovering around 12,600 points. At the current level of price-to-earnings multiples of 15.3 on a forward-earning basis, S&P is back to the levels it was at roughly four months ago. Moreover, going by the earning yields at current level, stocks are still giving returns significantly above the 10-year US bond yield. So the chances that this (sell-off) phase of US markets will continue for long is also not very likely. Overall, it is reasonably possibile that US markets now enter a consolidation phase, with chances of major correction very limited.
So, what about Indian markets? These have in the past shown resilience on global factors on the back of its own economic strength, and it appears that after the knee-jerk reaction on Friday, Indian markets may also consolidate with some downward bias. However, the Indian economy has its own strengths and weaknesses and it may not follow the global trend in toto. It is quite ironical that the best day of the earnings calendar of the first quarter was Saturday, when Reliance Industries Ltd and State Bank of India surprised analysts by easily beating expectations.
The markets will likely take note of these numbers today and may show some strength. The markets may also gain ahead of the scheduled review of credit policy due on Tuesday. Since the general expectation is of steady rates, expectations are really low and any positives in the credit policy could actually trigger fresh buying. On the downside, RBI may take up the issue of excessive liquidity in the system, which could hurt bank stocks. Also, with the beginning of new month, the data related to auto and cement industry may also give markets some direction.
Technically too, this view is reflected by short-term technical indicators, which show the trend would remain weak for now unless something extraordinary changes the sentiment completely. However, normally after a huge fall—like the one on Friday—some pullback is a market phenomenon, which we may witness in early part of the week. For the falling Sensex, the next and a crucial support level is at 15,116. If it closes below this level, the Sensex may then head for 14,828 level, which is likely to provide strong support. On the upside, the Sensex may face its first resistance at 15,422, following which a close above 15,654 would be essential to confirm the uptrend.
This week, Tata Power Ltd, Maruti Udyog Ltd and State Bank of India look good on charts.
Tata Power at current price of Rs700 has the potential to touch Rs736 with a stop loss of Rs664. Maruti Udyog at last close of Rs830 has the potential to touch Rs865 with a stop loss of Rs798. However, State Bank of India at the last close of Rs1,498 has a target of Rs1,555 with a stop loss of Rs1,463.
From our last week’s recommendations, Jai Prakash Associates Ltd, recommended at Rs835 a share, hit its target of Rs870 easily, and touched a high of Rs882.
HDFC Ltd, too, had a good run before Friday and touched a high of Rs2,050, just a tad below its target of Rs2,060. However, Titan Industries triggered its stop-loss.
Vipul Verma is a Delhi-based investment adviser.
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