As we usher in the new year, which promises to be action-packed and replete with new opportunities and challenges, the stock markets also are likely to be volatile, with global uncertainties looming. The key difference between the start of 2010 and 2011 is that last year, the markets were more confident, with economic stimulus to support them and inflation low; the expectations were for monetary policy to remain loose, which fuelled bullish sentiment on the markets. As we enter 2011, the undertone is not so optimistic. Inflation is galloping across the globe, exerting pressure on monetary policymakers. No more significant economic stimulus measures are expected this year. Rather, such measures are expected to expire or be rolled back. Moreover, with prospects of a European sovereign debt default still posing a big threat to the global economic system and a recovery in the US economy on shaky ground, 2011 promises to be a tough year. However, that does not mean the market sentiment has turned entirely bearish. Hopes of an economic recovery in the US and Europe and strong growth in Bric (Brazil, Russia, India and China) countries are likely to keep momentum alive on stock markets, though investors may act on negative triggers more forcefully than on positive signs.
On Indian markets, the growth story looks likely to be intact at least in the first quarter of 2011, which may get extended into the second quarter as well. Indian markets are looking attractive despite their high valuations because economic growth is likely to accelerate. In the year, I am expecting the Bombay Stock Exchange bellwether, the Sensex, to touch a high of around 23,500; the lower levels could be anywhere between 16,660 and 17,200. Going by these estimates, the index looks evened out between its highs and lows.
In the week, Indian markets are likely to start on a positive note on resumption of active trading and the return of foreign funds following a year-end lull. But I do not expect any significant run-up as caution prevails ahead of the start of earnings announcements. The absence of positive triggers may also restrict gains. The markets are likely to find direction only following the announcement of earnings by some key companies later in the month.
Globally, the week will see important employment reports unveiled in the US. The ADP employment report will be out on Wednesday, followed by weekly jobless claims on Thursday and non-farm payroll data on Friday. Since employment reports are a critical indicator of the strength of the world’s biggest economy, the three reports will be scrutinized very closely. If the reports fall short of expectations, investors will get a reason for profit-taking after a sharp rise in the US markets last month. US data on construction spending, same-store sales and the services sector will also be on the radar of analysts.
Technically, US markets are looking positive and are likely to extend gains. Indian markets are in a phase of upward consolidation, which means movement would be range-bound, but positive in the initial part of the week. If trading volumes fail to pick up, mild profit-taking could set in. The Nifty is likely to come across its first resistance at 6,176 points, which is likely to be a moderate level. If this level is overcome, the next meaningful resistance would come at 6,233, which will be an important level. If the Nifty closes above this level on good trading volumes, the market undertone would turn firm with more gains in sight and the resistance level shifting to 6,338, which would decide the short-term trend. On the downside, the first support for the Nifty is expected at 6,121. If this level is broken, the next support would come at 6,041, which is an important level. A close below this level would be bearish, with the next support coming at 5,956.
Among individual stocks this week, Shree Renuka Sugars Ltd, LIC Housing Finance Ltd and JSW Steel Ltd look good on the charts. Shree Renuka Sugars, at its last close of Rs97.10, has a target of Rs103 and a stop-loss of Rs91. LIC Housing Finance, at its last close of Rs194.4, has a target of Rs204 and a stop-loss of Rs183. JSW Steel, at its current price of Rs1,177.05, has a target of Rs1,204 and a stop-loss of Rs1,138.
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Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at email@example.com