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Markets likely to be cautious

Markets likely to be cautious
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First Published: Sun, Oct 09 2011. 10 02 PM IST
Updated: Sun, Oct 09 2011. 10 02 PM IST
In a holiday-shortened week, Indian equities fell on concerns over turmoil in the euro zone and recessionary pressures in the US. Ironically, European and American bourses posted handsome gains. France gained 3.8%, UK (FTSE100) rose 3.4% and Germany ended up 3.16%.
US bourses also gained about 2% over the week and after a brief brush with the bear market, bounced off the weekly lows. However, Indian markets fell sharply, though the Sensex was not the only one that declined in Asia—Hong Kong saw the heaviest losses not just in Asia but globally, too.
The main reason for the fall on Indian bourses was global concerns and selling by foreign funds, which dampened broader sentiment.
Indian economic indicators, including the HSBC Markit purchasing managers index (PMI), released last week, also showed weakness and dented sentiment. Monthly car sales were better than expected, but they could not arrest the weakness on bourses.
Friday’s strong rally on bourses tracking global recovery, however, comforted sentiment as it eased the threat of the breach of key resistance levels on benchmark indices in the immediate term. But the downward threat still persists.
The trend is likely to remain cautious as the earnings season kicks off this week with Infosys Ltd, India’s second-largest software services company, releasing its earnings on Wednesday. Analysts’ opinion is divided on the revenue guidance—some expect the company to cut its 2011-12 dollar revenue growth target as demand tapers.
In April-June, the company’s new client additions were the lowest in at least four years and it had warned in July that it faced a volatile global economy that could slow client spending.
The impact of the sharp fall in rupee could be the catalyst in the earnings of technology companies, improving their margins. But it could also lead to mark-to-market losses on currency hedges taken by the companies.
Overall, the expectation from the earnings of Infosys and other large IT companies are positive, but no one is expecting any dramatic announcement.
Economic indicators, including industrial and manufacturing output data for August and Wholesale Price Index (WPI) inflation due this week, will be watched closely for cues. India’s monthly industrial output data, which saw a sharp fall last month, will be a very important indicator. Any signs of further weakness in industrial output will be seen negatively by the stock markets.
Higher than expected inflation numbers will also be a big blow to the stock markets. So, fundamentally, this week promises to be full of action, which will keep the volatility alive on the bourses.
The European and US markets, which posted gains on short covering in stocks after hopes emerged that European officials will be able to tie down the crisis in euro zone, may continue to trade higher in the early part of the week. But the gains will be capped unless more information on concrete measures in euro zone is released.
Apart from news from euro zone, which will continue to dominate sentiment, the earnings season in the US will also draw investor attention. In the US, the earnings season begins on Tuesday, with Dow component Alcoa Inc. due to report its third-quarter results after the close of trading.
Other US firms due to report earning this week, include PepsiCo Inc, Google Inc., JPMorgan Chase and Co. and toy maker Mattel Inc. Among key economic indicators, the minutes of a two-day FOMC (federal open market committee) meeting, import prices and retail sales for September and the preliminary reading on October consumer sentiment will be watched closely for cues. After a surprisingly good week of economic indicators, investors would like to cross-check with this week’s economic data before taking a call on the strength of the US economy.
Back home, the markets are likely to resume on a cautiously positive note on Monday as they lack positive triggers and may trade range-bound initially. But they may see some increased activity from Wednesday. Technically, the trend on bourses is sideways with some more consolidation in the pipeline.
Last week, the Nifty failed to cross its key resistance lever at 4,924 points and settled below this level. Unless the Nifty closes above this level with good volumes, the downward pressure is likely to remain.
If the Nifty settles above this level, then the next resistance level would come at 4,981 points. If the Nifty crosses this level, too, with good volumes, then the sentiments on the bourses will improve significantly and the Nifty will then head to 5,035 points, which is another strong resistance.
This level may see some profit selling, however, if volumes continue to support strength then there will be further gains and the Nifty could then be headed to its most important resistance level of 5,167 points, which will be a trend decider in the short term. Any close above this level will end bearish sentiment in the short term.
On the downside, the Nifty will have its first support at 4,863 points, which will be a moderate support level. The next support will come at 4,818 points, which will be an important support level.
Breach of this level will open the next downward channel, which might take the Nifty down to 4,712 points, which is likely to be a very strong and important support level.
Among individual stocks, this week ABG Shipyard Ltd, Hindalco Industries Ltd and LIC Housing Finance Ltd look good on the charts.
ABG Shipyard at its last close of Rs 385.10 has a target of Rs 396 and a stop loss of Rs 372. Hindalco Industries Ltd at its last close of Rs 125.90 has a target of Rs 131 and a stop loss of Rs 119, while LIC Housing Finance Ltd at its last close of Rs 216.90 has a target of Rs 223 and a stop loss of Rs 209.
From my previous week’s recommendations, Maruti Suzuki India Ltd and Cairn India Ltd overshot their targets, while Hindustan Zinc Ltd missed its target and continues to be a valid recommendation.
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 09 2011. 10 02 PM IST