Indian markets bounced back sharply after being hammered in the last five out of six weeks on concerns of mounting inflation and monetary tightening. Pull-out by foreign funds had also weighed on market sentiment, triggering the fall. Finally, a combination of short covering and bargain hunting led to the recovery on bourses, which, somehow, lacked full conviction of bottoming out of the market as short positions were still at large and investors still see downside in the market. Moreover, focused selling in the Anil Ambani-led Reliance Group stocks, further added to the gloom on bourses. Though it might be beyond the scope of this column, the way all Reliance Group stocks fell needs special mention. The fall in the stocks was quite unconvincing, and it looks unnatural and motivated as group stocks across all industries fell. Even if there is some issue with Reliance Communications Ltd, it could mean that some practices are not fair, but it does not mean that the business model of the company or the potential of the second-largest mobile operator is questionable. The law will punish the guilty, but apparent motivated selling has already punished millions of shareholders.
Moving on, the gain of about 2.8% on Indian bourses compares well against global peers as only Brazil and Hong Kong fared better than Indian markets with gains of 3.51% and 3.36% respectively. However, a firm trend on major global markets, including the US, Europe, China etc., added to the positive undertone. The flow of positive economic data in the US, except for weekly jobless claims, upholds the view that the US economy is progressing well on the growth track. However, the Chinese inflation scenario remains worrisome and Chinese aggressive monetary tightening has started denting positive sentiments. China, on Friday, raised required reserves to a record 19.5%, adding to an increasingly aggressive effort to stamp out stubbornly high inflation. The fifth increase since October will remove cash from the economy that otherwise would be pushing prices higher. The move by the People’s Bank of China followed an acceleration in inflation to 4.9% in the year to January, which was accompanied by worrying signs that price pressures were spreading beyond food to property and consumer goods. However, similar to the muted response to the hike in interest rates by China last week, the response of the major global markets such as the US and Europe to this move was also flat as US markets posted handsome gains on Friday, following the Chinese move to hike the bank reserve requirement. It was comforting to see that even metal prices led by copper on the London Metals Exchange bounced off their lows on Friday. Normally, international copper prices respond sharply to Chinese monetary tightening moves. Going forward, the global markets are likely to continue with the upward trend as the underlying sentiment remains strong. Among economic indicators for this week, investors will get a sense of the state of economic growth from fourth quarter 2010 gross domestic product data on Friday. This week, the housing related data will be on analysts’ radar, which includes S&P Case-Shiller home prices on Tuesday, existing home sales on Wednesday and new home sales on Thursday.
Back home, the week is very hectic with major events such as the economic survey and the rail budget. Markets would wait for the union budget (on 28 February) before charting the next course. However, the economic survey will throw some convincing light on the state of the economy and give some direction, while the budget would provide necessary momentum. The week is likely to start on cautiously positive notes following strong hammering on Friday. However, volatility will continue to dominate ahead of the expiry of derivative contracts due on Thursday.
Technically, the markets are looking weak, and unless the benchmark indices rebound on Monday and cover up half of Friday’s losses, the undertone is likely to remain weak. However, no big-ticket fall is visible on the charts, and the movement would be primarily range bound. On its way up, the Nifty will see the first resistance at around 5,512 points, which is likely to be a moderate one only. If this resistance goes, the next would come up at 5,552, which is good. Technically, the Nifty could see some consolidation around this level. However, if Nifty crosses this level with good volumes, the bullish sentiments would be confirmed and market would aim at higher levels. The next resistance at 5,623, will be a moderate one only, followed by a strong resistance at 5,742.
On its way down, the Nifty has just settled below a critical support at 5,465 points. This has added to the negative undertone. Though Nifty will open higher on Monday, it would be important to see if it maintains positive momentum. If it fails to maintain the opening momentum, it would find meaningful support at 5,408, from where the Nifty should bounce back at least temporarily. However, if volumes dwindle with the fall, this could be the turning point for the Nifty in immediate term. However, if volumes remain strong, it would add to the downward risk, which can push the Nifty to its next support at 5,314, which is likely to be a strong support. However, my analysis says the Nifty should bounce off 5,408 levels.
Among individual stocks, this week, Hindalco Industries Ltd, Alstom Projects India Ltd and Infosys Technologies Ltd look good on the charts. Hindalco, at its last close of Rs 209.60, has a target of Rs 221 and a stop-loss of Rs 199. Alstom, at its last close of Rs 565.80, has a target of Rs 583 and a stop-loss of Rs 551, while Infosys, at its last close of Rs 3,100.30, has a target of Rs 3,352 and a stop-loss of Rs 3,042.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org