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Consolidation likely to continue

Consolidation likely to continue
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First Published: Sun, Oct 02 2011. 08 32 PM IST

Graphic by Shyamal Banerjee/Mint
Graphic by Shyamal Banerjee/Mint
Updated: Sun, Oct 02 2011. 08 32 PM IST
Indian stock markets posted moderate gains over the previous week amid concerns of turmoil in the euro zone and fears of recession in the US and elsewhere. The gains were largely driven by short covering by traders, selective bargain hunting by funds and developments in the euro zone. The gains were triggered across the globe after the German Parliament backed plans to boost the size and remit of the euro zone bailout fund, as agreed in July, providing a fillip for those keen to see signs of core euro zone political unity.
Graphic by Shyamal Banerjee/Mint
However, signs of hard landing by the Chinese economy on Friday—as reflected by HSBC’s China flash purchasing managers’ index (PMI) showing the longest contractional streak since 2009—sent global stock markets into a tailspin. Saturday’s economic data from China reassured analysts that concerns over the state of the Chinese economy could be overblown, and this is likely to nullify Friday’s losses on the Wall Street when Asian bourses resume trading on Monday.
The data showed China’s factory activity picked up in September for the second month in a row and export orders strengthened. The official PMI inched up to 51.2 from August’s 50.9 and showed inflation pressures eased slightly; but was not enough for Beijing to relax in its battle against soaring prices.
A bunch of good economic indicators released on Friday raised the bar of optimism slightly for the US economy, but news from the euro zone continued to remain worrisome. Annual consumer prices unexpectedly rose 3% in September, followed by surprisingly higher inflation in Germany.
Back home, sentiments were broadly driven by global factors, as there wasn’t much on the economic platter. Data released on Saturday showing auto sales of Mahindra and Mahindra Ltd and Tata Motors Ltd rising more than expected is likely to boost sentiments in auto stocks on Monday.
The end of a workers’ stir at Maruti Suzuki India Ltd will also be a positive for stocks on Monday. However, what the market will watch more closely will be the HSBC Markit manufacturing PMI for September. Data on India’s foreign trade will also give some insight on the performance of the Indian economy, but it will not have any significant impact on the bourses.
Globally, US employment data, including ADP employment report (Wednesday), weekly jobless claims (Thursday), unemployment rate and the monthly non-farm payroll output (Friday) will be watched closely this week for vital cues on the US economy. US manufacturing data from the Institute for Supply Management (ISM) on Monday and the ISM services sector index, set for release on Wednesday, will also be indicators. Any sign of stability or growth in the US economy will trigger positive sentiments. Broadly, investor sentiment will remain cautiously optimistic globally ahead of the earnings season.
Back home, technically the trend on bourses is cautiously positive, as a consolidation on bourses is likely to continue this week as well. Though a downside cannot be ruled out, the chances of markets posting gains this week are more. On its way up, the benchmark Nifty will meet its first meaningful resistance at 5,031, which, if broken, will boost sentiments. There is an 80% probability that the Nifty will breach this level, following which the upside will widen; and though the Nifty will have an immediate resistance at 5,061, it may not pose any serious threat to the upward momentum. The Nifty could see another resistance at 5,116, but this will be moderate resistance and won’t threaten the trend. The 5,168 level will decide the short-term trend on the bourses.
On its way down, the Nifty has a very important support at 4,902, which, if broken, will be negative for stock markets, and the chances of a further fall will increase by up to 90%. The next support will be 4,862; but being a moderate support, it may not be able to withstand volume-led selling. In case this level is breached, the next support will come at 4,818, followed by a strong support at 4,748 points.
Among individual stocks, Cairn India Ltd, Maruti and Hindustan Zinc Ltd look promising. Cairn India, at its last close of Rs 272.80, has a target of Rs 280, and a stop-loss of Rs 261. Maruti, at its last close of Rs 1,083, has its target at Rs 1,106, and a stop-loss at Rs 1,051. Hindustan Zinc, at its last close of Rs 118.80, has a target of Rs 125, and a stop-loss of Rs 112. From my previous week’s recommendations, ACC Ltd and Dish TV India Ltd met their targets while JSW Steel Ltd hit its stop-loss.
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, Oct 02 2011. 08 32 PM IST