Indian stock market indices posted a loss of roughly 4% in the first week of the new year as concerns over rising food price inflation because of supply-side constraints stoked fears of more monetary policy tightening. Annual food price inflation accelerated for the fifth straight week in late December to the highest level in more than a year, reinforcing expectations of an interest rate hike at the Reserve Bank of India’s monetary policy review later this month. The central bank raised policy rates six times in 2010, and more rate increases could be detrimental to economic growth. Such concerns led to heavy selling in banking, real estate and other interest rate-sensitive stocks.
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Global cues remained broadly positive despite some disappointment over US non-farm payroll data, which rose by a less-than-expected 103,000. But overall employment for October and November was revised upward to show 70,000 more job gains than previously reported. Moreover, a surge in the dollar index to 81.02 saw some selling in commodity stocks as metals were hit by the strength of the US currency. News from Europe was mixed, however; concerns of a debt crisis still remain. This was reflected in Portugal’s sale of €500 million ($664.9 million) of six-month treasury bills at sharply higher yields than in September. The week’s most awaited debt sale clearly indicated that investors remain worried the country may yet need a bailout.
Going forward, third-quarter earnings announcements starting this week will provide cues for investors and set the direction for stock markets. In the US, Alcoa Inc. will release its results on Monday after the market’s close. Other big US companies like Intel Corp. and JPMorgan Chase and Co. will issue their report cards later in the week and are expected to do well. Good results, however, may not necessarily translate into a Wall Street rally. Alcoa has already soared 25% and JPMorgan gained 16% since 7 December 2010. Their stock prices seem to have factored in good results. Back home, the earnings season would begin with Infosys Technologies Ltd releasing its numbers on 13 January. Since Infosys is seen as an information technology bellwether, its earnings will be closely tracked by a market that’s looking at corporate earnings to find direction. Apart from corporate earnings, industrial output and manufacturing data would be watched very closely on 13 January. If the numbers signal growth, benchmark indices would receive a lift. As far as interest rates are concerned, I think the markets have now factored in a 25 basis points hike. One basis point is one-hundredth of a percentage point.
In the US, retail sales data—due on Friday—will be watched very closely, especially after the December holiday season’s softer sales. If retail sales are able to impress investors, the sentiment on US markets would gain a significant boost.
Technically, Indian markets are now getting into the oversold zone and downward potential still remains. The markets, despite the sharp corrrection last week, are still not close to bottom.
On its way down, the Nifty has its first major support at 5,856 points, which is likely to be good support. However, if this level is broken, a bearish outlook would be reinforced with the next support expected at 5,791 points, which is a moderate level, followed by strong support at 5,712 points.
On the upside, the Nifty is likely to find its first resistance at 5,953 points, which is a moderate level, followed by important resistance at 6,051. Unless the Nifty closes above this level, the undertone will remain bearish. A close above this level would see resistance shifting to 6,126 points, which is a moderate level. The Nifty faces important resistance at 6,191 points; if the index closes above this level on good volumes, it would mean that the Nifty might touch its all-time high shortly.
Among individual stocks this week, Cairn India Ltd, ICICI Bank Ltd and ABB Ltd look good on the charts. Cairn India, at its last close of Rs340.15, has a target of Rs352 and a stop-loss of Rs334; ICICI Bank, at its last close of Rs1,049.20, has a target of Rs1,074 and a stop-loss of Rs1,022. ABB, at its last close of Rs781, has a target of Rs797 and a stop-loss of Rs759.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at email@example.com