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Investors should keep booking profits

Investors should keep booking profits
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First Published: Sun, Sep 12 2010. 08 39 PM IST
Updated: Sun, Sep 12 2010. 08 39 PM IST
Strong buying by foreign institutional investors and build-up of fresh long positions by traders helped Indian stock market indices advance by about 3% last week, making them the top gainers for the week. Positive economic data from the US, Europe and China contributed to a rally in most overseas markets as well.
On Friday, a market holiday in India, industrial production data showed that factory output in July expanded 13.8% from a year earlier, nearly double analyst estimates and the fastest pace since April. This week, however, the attention of market participants will be on the Reserve Bank of India’s mid-quarter monetary policy review on Thursday when the central bank is expected to raise interest rates. The announcement will be preceded by inflation data on Tuesday that’s likely to show wholesale price-based inflation eased to 9.6%. A higher-than-expected reading would strengthen the case for an interest rate increase.
However, despite jitters over an imminent rate hike, the markets are likely to resume higher on Monday on the higher-than-expected industrial output data. Indian markets also need to catch up with overseas counterparts that posted gains on Friday. Data released on Saturday showed Chinese factories ramped up production in August, with industrial output topping expectations. Money supply growth also remained high, showing that the Chinese economy remains buoyant despite government efforts to clamp down on bank lending and property speculation. However, inflation also jumped to 3.5% year-on-year to its fastest pace in 22 months. But this will not upset buoyant Chinese and global bourses because much of the rise in inflation was due to higher food prices, diluting the case for a rate hike in China. The impact of Saturday’s Chinese data would get reflected on world stock markets on Monday, and coupled with the positive Indian industrial output data, should make for further gains at least in the early part of the week.
In the US, the week’s economic calendar includes retail sales numbers due on Tuesday, industrial production and capacity utilization data on Wednesday, the Producer Price Index and jobless claims on Thursday and the Consumer Price Index and consumer confidence data on Friday. There is a strong trading clue from the US that can’t be ignored. In Friday’s options trading, Wall Street’s fear gauge VIX suggested that traders are pessimistic to the extent they expect a more than 100% jump in the volatility index. A rise in the index, which as a rule of thumb is inversely proportional to the S&P 500, could lead to a sharp fall on US markets. But since this is just a trading clue and fundamental cues are more important in the current situation, the probability of such a situation emerging is quite low. However, the trading element could add to volatility on US bourses towards the end of the week. This may have an impact on other global markets, including India, which are now running ahead of their fundamentals. One definite conclusion from this analysis is that as a trading strategy, leaving big overnight positions may not be desirable this week and investors should keep booking profits, more so from the middle of the week.
Technically, as I mentioned in my last column, the Nifty has the potential to cross 5,700. This will happen this week as, after a moderate resistance level at 5,678 points, the only critical resistance for a rising Nifty is at the 5,740-5,763 points level, which purely technically should see some consolidation and profit selling. If the Nifty turns back from this level, there would be a technical correction; if it convincingly crosses this level on sharply higher trading volumes, there would be further gains, which may lead the Nifty to 5,810 levels. However, I would suggest focusing on the 5,740-5,763-point band as this is crucial for the Nifty this week.
On its way down, the Nifty has its first support at 5,571 points, which is a very critical level. If this level is broken and the Nifty closes below it on good volumes, it would be a sign of a technical correction.
The next support level is likely to be at 5,468 points, which is again a very critical support and likely to hold in normal circumstances.
Among individual stocks this week, Housing Development Finance Corp. Ltd (HDFC), Tech Mahindra Ltd and Larsen and Toubro Ltd look good on the charts. HDFC, at its last close of Rs 629.95, has a target of Rs 646 and stop-loss of Rs 612. Tech Mahindra, at its last close of Rs 711.20, has a target of Rs 732 and stop-loss of Rs 689. L&T, at its last close of Rs 1,881.50, has a target of Rs 1,910 and stop-loss of Rs 1,846.
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: Sun, Sep 12 2010. 08 39 PM IST