Key indices ended a holiday-shortened week with gains, thanks to persistent buying by funds and traders. Interestingly, most global indices ended the week with losses. Thursday’s losses on Wall Street, which were extended the following day, weren’t reflected on Indian markets that were shut on Friday for Mahatma Gandhi’s birthday.
That will likely see a sharp fall on Monday as the markets catch up with overseas counterparts. However, I don’t see the expected decline as the beginning of a technical correction, the logic being that there is sufficient money chasing Indian stocks and no sane investor would hit the panic button ahead of the start of a crucial earnings season. The persistent weakness of the US dollar against a basket of global currencies is likely to keep foreign investors in the fray, which would help limit any losses. Matching global sentiment, Indian indices could see a decline of 4-5%, which would be a good level for the fence-sitters among investors to enter the market.
On the economic front, the HSBC Markit Purchasing Managers’ Index (PMI) rose to 55 in September, from 53.2 in August, reflecting domestic demand and a pick-up in factory orders. But inflation, which is rising at a faster- than-expected pace, is gradually becoming a concern for the economy. The inflation rate based on wholesale prices rose to 0.83% in the week ended 19 September, from 0.37% the week before, mainly due to surging food prices. This may invoke a change in the central bank’s policy stance and cause the Reserve Bank of India (RBI) to start unwinding some of the stimulus it provided the economy to shield it against the effects of the global economic crisis. RBI, which has cut interest rates six times since October last year, may raise banks’ reserve requirements or take out some of the extra cash it has been leaving in the banking system. Although immediate action is not expected, RBI could swing into action as early as the next quarter.
On the monsoon front, rainfall in June-September was 23% below normal, the weakest since 1972, threatening to affect rural incomes and spending. The performance of exports hasn’t been encouraging. Exports fell nearly one-fifth in August from a year earlier, an 11th straight monthly decline, as demand remained sluggish. The International Monetary Fund lowered India’s 2010 growth forecast slightly to 6.4%, from 6.5%. On the brighter side, the auto industry’s performance remained encouraging in September, when sales of cars and two-wheelers received a boost from the festive season and cheaper credit.
Going forward, earnings will be the prime focus this week—both globally and domestically. In the US, the earnings season will be kicked off by Alcoa Inc. on Wednesday, followed by marquee names such as PepsiCo Inc., Yum Brands Inc., Costco Wholesale Corp. and Monsanto Co.
Back home, technology bellwether Infosys Technologies Ltd will start the big-ticket earnings season on 9 October. The results of Infosys and other index majors will be watched closely, with a special focus on their revenue guidance.
The S&P CNX Nifty has moderate but important support at 5,006 points. If this support goes, the Nifty would fall further, shifting its support to 4,924 points. If the Nifty bounces up from this level, there could be a healthy rise; a fall from here would push support down to 4,878 points. A drop below this level would be extremely bearish. On its way up, if the Nifty closes above 5,096 or crosses this level on good volumes, there would be further gains and the index would see its next resistance at 5,134. This would be strong resistance, but if breached, would ensure further gains. The next solid resistance would be at 5,204 points.
Crucial factor: Traders at the New York Stock Exchange on Friday. The earnings season starts Wednesday in the US. In India, technology bellwether Infosys Technologies will start the season later in the week. Henny Ray Abrams/AP
In terms of the Bombay Stock Exchange’s Sensex, the first support is expected at 16,881 points, which is a moderate level. The next support level would be 16,646, followed by 16,492, which would offer solid support. On its way up, the Sensex would test its first resistance at 17,185, followed by 17,315 and very strong resistance at 17,678.
Among individual stocks, Reliance Capital Ltd, Bank of Baroda, and Power Finance Corp. Ltd look good on the charts. Reliance Capital, at its last close of Rs912.15, has a target of Rs934 and a stop-loss of Rs881. Bank of Baroda, at its last close of Rs480.50, has a target of Rs491 and a stop-loss of Rs465. Power Finance Corp., at its last close of Rs229.25, has a target of Rs242 and a stop-loss of Rs218.
From the previous week’s recommendations, Axis Bank Ltd gained 11.27% and Bharat Heavy Electricals Ltd rose 5.7%, meeting their targets very easily. Alstom Projects India Ltd also met its target during the week.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at email@example.com