The Bombay Stock Exchange’s (BSE) benchmark index, the Sensex, gained for a 14th consecutive week on buying by foreign funds. As expected, however, the markets showed signs of weakness from the middle of the week and declined on Thursday and Friday.
The signs of fatigue had been expected. One noticeable change is that investors have started reacting negatively to even positive news—a trend not limited to India alone. News that US banks would repay funds received under the so-called Troubled Asset Relief Program was encouraging as a sign of recovery in the US financial system. But the market reacted negatively.
In India, the monthly index of industrial production data for April, which was well above expectations, triggered selling because investors were concerned that the numbers could be an inflationary signal that may dampen prospects of interest rate cuts. I do not share the concern because these are preliminary signs of economic recovery rather than overheating. The behaviour of investors shows that the markets are now getting overheated following the massive rally beginning in March.
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This leads to the question: Does this mean that the bull run is now over and it is time to sell? My answer is NO. Neither is the bull run over nor is this the time to wind up. I would not rule out moderate profit selling, but I strongly feel that unless something major happens, fundamentally, the market will not move considerably in either direction until the budget is presented next month.
The budget has been a non-event for the last three-four years because the compulsions of coalition politics led to a pause on most economic reforms. However, with a stable government emerging from the Lok Sabha elections, the market is clearly hoping for a strong budget that would herald a new era of economic reform.
Until the budget, hope would keep the market up and any major wave of selling would be countered by bargain hunting. The actual budget proposals would set the next course of action for investors.
Global market trends and economic data also would dictate day-to-day share price movements. With no major economic data due this week in India, the markets would likely take their cues from overseas.
Globally, the markets will watch data on US housing starts, the Consumer Price Index (CPI), the Producer Price Index (PPI) and other numbers including industrial production and capacity utilization as well as weekly initial jobless claims.
Rising oil prices and higher bond yields are also major concerns for the US economy that would be monitored very closely. The yield on the benchmark 10-year US treasury note briefly touched 4% after Wednesday’s auction of 10-year notes. That stoked fears of a possible reversal of the rate cut cycle initiated by the US Federal Reserve to boost a recession-bound economy.
If yields remain high this week, market sentiment could be severely dented. In such circumstances, inflation data measured by both CPI and PPI would be watched even more closely than usual.
Technically, the markets are showing signs of consolidation. Unless the key indices break their critical resistance or support levels, there would be no clear direction for the bourses. For the Sensex, the critical resistance level is at 15,589 points. If the index closes above this level on good trading volumes, the trend would be bullish.
Other important resistance levels for a rising Sensex would be 15,398 and 15,517 points. On the downside, the critical support level is at 14,591 points and any close below this level would be bearish. However, the market will have intermediate support levels at 15,147 points and 14,929 points.
In terms of the S&P CNX Nifty, the critical resistance is at 4,694 points. Before that, there would intermediate support at 4,624 and 4,663 points. On the downside, the critical support is now at 4,351 points. Before that level, support is expected at 4,557 points and 4,401 points.
Among individual stocks, Bharat Forge Ltd, Moser Baer India Ltd and Adlab films Ltd look good on the charts. Bharat Forge, at its last close of Rs181.10, has a target of Rs192 and a stop-loss of Rs168. Moser Baer, at its last close of Rs105.85, has a target of Rs116 and a stop-loss of Rs98, while Adlab Films, at its last close of Rs405.20, has a target of Rs423 and a stop-loss of Rs392.
From the previous week’s recommendations, Oil and Natural Gas Corp. Ltd touched a high of Rs1,193.70, but missed it target of Rs1,220 and remains a valid recommendation for this week. Jindal Steel and Power Ltd touched a high of Rs2,629, gaining 15.5% over the previous week. Needless to say, the stock met it target very easily. ABG Shipyard Ltd triggered its stop-loss.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at email@example.com