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Low crude prices a positive trigger

Low crude prices a positive trigger
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First Published: Mon, May 09 2011. 01 15 AM IST
Updated: Sat, Jul 02 2011. 02 31 PM IST
Markets keep reminding important rules of stock market investment every now and then. This week the market reminded of the basic yet most important rule: the market is always right. The last week’s stock market movement was on expected lines though I have pointed out in earlier columns that if the Nifty index on the National Stock Exchange breaks below 5,691 points on the lower side, there will be a bearish move. It happened last week. Reacting to the Reserve Bank of India’s (RBI) move to raise its by half a percentage point, the Nifty broke this critical band and went in for spin. My initial expectation was of a good support at around 5,500, which was broadly based on the market scenario before the RBI meeting. However, after RBI’s announcement, the scenario changed completely, so the strength of support level also weakened due to the ferocity of fall on good volumes and sinking sentiments on bourses pushed the Nifty down further.
Though neither monetary tightening nor high rates of inflation was new to market, as we have been facing this for no less than a year, by and large markets have already discounted high rates of inflation and hawkish tone of RBI. The strong rally markets witnessed before this fall bears testimony to this fact. However, the higher-than-expected hike triggered a sell-off.
The fundamental rule of the stock market mentioned earlier finds its relevance here. I strongly believe that RBI did not do anything that was beyond the scope of policy framework and economists would agree with me that RBI has a target range for interest rate hike, which means that hiking the rates by 0.5% is not a precedence for its next moves as there is a target range for interest rates, which is most likely of 1.25%, so a rate hike of 0.5% means limited options with RBI going forward. However, the way markets reacted proved the basic rule that the market is always right.
Apart from Osama bin Laden, the most important news last week was sharp fall in crude oil, silver, sugar and coffee prices. The sell-off in crude and silver prices was more prominent as it was quite sudden and largely unexpected. This triggered a chain reaction as a sharp fall in these commodities boosted the dollar, which was falling consistently for three weeks and was posing serious problems. The dollar also gained strength after the European central bank president Jean-Claude Trichet struck a less hawkish tone than expected.
The stronger dollar also led to sharp fall in other commodities such as copper, which also saw a sharp fall over the week. Another factor contributing to strong dollar was sharp fall in euro following reports by German magazine Der Spiegel that Greece was considering exiting the euro zone. The report was denied by the Greek Prime Minister, but it caused enough damage to global sentiments and the euro.
However, this episode has a silver lining as well. Cooling of crude prices will have a soothing impact on emerging economies that are trying hard to swim against the tide. Since crude prices are not expected to gather the same momentum as they were witnessing before, in short term at least, this is in a way good news for economies affected by high rates of inflation such as India. Another positive anchor for global sentiments was US non-farm payroll data, which was released on Friday, allayed fears that the US economy is slowing down.
Back home, this week is going to be lot better as the worst sentiments are over. This does not mean a runaway rally as underlying sentiments still remain cautious and the market clearly has no trigger except for sharply low global crude prices. Sentiments would largely be driven by foreign fund activity and global economic indicators.
Technically, Indian markets are likely to move up amid cautious sentiments. The first resistance of 5,583 on the Nifty is placed close to the current level, but if it goes, it may boost positive sentiments. The next resistance level would come in the 5,680-5,710 band and this level would be crucial. If the Nifty closes above this, then positive sentiments would become stronger and the next key resistance level would come at 5,778.
On its way down, the Nifty has its first support at 5,491, which is a minor support. The next support will come at 5,439, which is a critical support level as comfortable close below this level or fall with good volumes would mean the next strong support would come only at 5,312. This may not be the bottom if volumes continue to be high. If volumes dry up with the fall, then this will be a strong support in short term and the Nifty will not fall below this level. If volumes remain high, the short-term bottom of the Nifty would come at 5,221.
Among individual stocks, Dr Reddy’s Laboratories Ltd, ACC Ltd and Bhushan Steel Ltd look good on charts. Dr Reddy’s at its last close of Rs 1,604 has a target of Rs 1,636 and a stop-loss of Rs 1,566. ACC at its last close of Rs 989.70 has a target of Rs 1,114 and a stop-loss of Rs 962, and Bhushan Steel at its last close of Rs 472.35 has a target of Rs 484 and a stop-loss of Rs 459.
Vipul Verma is chief executive officer, Moneyvistas.com.
Comments, questions and reactions to this column are welcome at ticker@livemint.com
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First Published: Mon, May 09 2011. 01 15 AM IST