This column got it wrong in predicting that the markets would weaken last week. Indian markets actually posted gains though trading volumes remained low. The basis of my analysis had been strength in the dollar index, which tracks the US currency’s performance against that of six major trading partners. Though it edged up initially on expected lines, it consolidated later in the week, mainly due to the beginning of the holiday season. Interestingly, Indian stocks attracted bargain buying, which was a good sign.
Globally, the trend remained positive, with the S&P 500 ending up 1%. The Dow gained 0.7% and the Nasdaq rose 0.9%. It was the fourth week of gains for the Dow and the S&P, and the fifth week of gains for the Nasdaq. European indices also posted gains, with the FTSE100 rising 2.34% over the week. China was the top loser, falling over 2% over the week on concerns about surging inflation.
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The gains could be largely attributed to economic inactivity. A holiday mood prevailed on the markets and fund activity remained thin, with trading volumes at the lowest levels for the year. But despite low volumes, investor sentiment remained bullish in the US. According to the latest AAII Sentiment Survey, the level of optimism rose to 63.3% in the week ended 22 December, the highest since 18 November 2004. The level of pessimism was at the lowest since 24 November 2005, and the bull-bear spread was at the highest since 15 April 2004. This shows that despite US markets being in an overbought zone, the bullish sentiment is likely to keep momentum alive.
Going forward, the markets are likely to edge up in the last week of 2010 as investors bet on brighter prospects during 2011. The trend would be broadly range-bound as funds would wait for fresh allocations before taking a call on investment, but 11th-hour window dressing of portfolios might attract some bargain buying from funds.
This week, the economic calendar in the US is pretty light. Key economic indicators this week include the S&P Case-Shiller home price index and consumer confidence data on Tuesday, and numbers relating to jobless claims and pending home sales on Thursday. Jobless claims data has maintained a downward trend and boosted market sentiment. This is likely to continue this week as well. The consumer confidence data would be watched very closely by investors for cues. If the data beats market expectations, then it might extend the Santa Claus rally on US markets. Global markets would also closely watch developments in China, where the authorities have reiterated that they would take appropriate steps to contain inflation. China’s central bank raised key interest rates on Saturday by a quarter of a percentage point.
Back home, the infrastructure output data for October would be watched closely for cues on the Indian economy. If the data indicates a pick-up in infrastructure activity, it would be a welcome sign for investors, who have been looking for triggers to catch up with bigger gains on overseas markets. Disappointment on this count could trigger some profit-selling as well.
Technically, the markets are now looking better than the previous week and may extend gains in a range-bound fashion during the week. On its way up the Nifty is likely to come across its first resistance at 6,032 points, which is an important level. Unless the Nifty closes above this level on good volumes, the underlying sentiment is not likely to change. If the Nifty closes above this level on good volumes, market sentiment would turn bullish and the resistance for the Nifty would shift to 6,078. This is an important resistance level and might impede a rising Nifty.
If the Nifty does not succumb to selling pressure around this level, it may find itself in a bullish zone with the next resistance level of 6,132 in sight. However, if the Nifty retreats from this level convincingly, the market could fall to as low as 5,856 points. Coming back to resistance levels, if the Nifty crosses 6,132, it may aim for its next resistance at 6,223.
On its way down, the first support for the Nifty is likely to come up at 5,991, which is an important level. If this level goes, the markets would extend their fall and the Nifty could slip to its next support level of 5,933. However the index has strong support at 5,856. A fall below this level would mean bearish sentiment and more declines in the offing.
Among individual stocks this week, Housing Development Finance Corp. Ltd (HDFC), Biocon Ltd and State Bank of India (SBI) look good on the charts. HDFC, at its last close of Rs 698.90, has a target of Rs 717. Biocon, at its last close of Rs 407.90, has a target of Rs 420 and a stop-loss of Rs 392 while SBI, at its last close of Rs 2,755.35, has a target of Rs 2,822 and a stop-loss of Rs 2,678.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org