There are two basic rules of the stock market. One, market movement is asymmetric and even in the same set of circumstances, the markets may react differently. Second, the market is always right. Both rules were proved correct on Friday, when US markets gained. The gains followed a surprisingly anaemic non-farm payrolls report, which showed a loss of 95,000 jobs in September.
Rude shock should typically have greeted the numbers, which came after an ADP employment report that was in line with expectations and a better-than-expected weekly jobless claims report.
But the markets notched up handsome gains on hope that this would prod the Federal Reserve into easing monetary policy and pump more liquidity into the system, which will also weaken the dollar, pushing more money into stocks worldwide.
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This is clearly asymmetric behaviour; for those who question how signals of weakness in the world’s largest economy could be taken positively by the stock market, the second rule provides the answer—the market is always right.
Well! No matter what the future holds for global economies, the trend on global markets is pointing up on renewed optimism that monetary easing by the Fed is in the works, whatever the logic and economic fundamentals.
The micro fundamentals of the US economy may spur optimism, but the macro-economic situation continues to be grim and suggests that stock prices are running ahead of their valuations.
Going forward, Asian markets are likely to resume on a positive note on Monday and India too would see gains.
However, some caution would prevail on Indian markets, with investor sentiment a little nervous ahead of the monthly industrial output and manufacturing output data, which is scheduled for release on Tuesday.
Illustration: Shyamal Banerjee/Mint
Monthly inflation data, which has gained in prominence since the start of monetary tightening by the central bank, would also be watched very closely on Thursday.
The earnings season starts on Friday when Infosys Technologies Ltd declares its quarterly numbers, seen as a bellwether of the information technology industry.
Globally, the earnings season would shift to top gear with numbers from Intel Corp., JPMorgan Chase and Co., Google Inc. and General Electric Co. due this week. Since these are all big US corporate names, their results will have a lot of bearing on market sentiment. Apart from earnings, treasury auctions, especially of 30-year bonds, would also be watched very closely.
Investors will also keep an eye on the dollar index, which tracks the greenback against the currencies of six major trading partners. Further weakness in the dollar will be welcomed by equity markets.
Among key economic indicators, consumer and producer prices, retail sales and consumer sentiment data would be analysed to judge whether the US economy has slowed enough to require swift action by the Fed.
Any signs pointing to action by the Fed becoming inevitable would boost stocks.
Technically, the markets, though in a short-term overbought zone, should remain around the same zone for longer because of extraordinary factors like liquidity, dollar weakness, and buying by foreign funds.
This week, the Nifty would take aim at breaking the critically important 6,200-point level. Nifty has been able to briefly surpass this level, but has not been able to convincingly breach it.
Before that, the index would test its first resistance at 6,162 points; any heavy short selling or profit booking at or around this level could affect short-term momentum.
If this level is breached without much difficulty, it would make way for the next and the most crucial resistance at 6,198 points which, if broken would signal a short rally. On its way down, the first support is likely to come at 6,039 points, followed by 5,991, and strong support at 5,931 points. Any close below this level would mark, in the short term, the end of bullish sentiment.
Among individual stocks this week, Axis Bank Ltd, Dish TV Ltd and HDIL Ltd look good on the charts. Axis Bank, at its last close of Rs 1,571.10, has a target of Rs.1,594 and stop-loss of Rs 1,543.
Dish TV, at its last close of Rs 54.60, has a target of Rs 58 and a stop-loss of Rs 51 while HDIL, at its last close of Rs 273.90, has a target of Rs 286 and a stop-loss of Rs 258.
Vipul Verma is chief executive officer, Moneyvistas.com. Comments, questions and reactions to this column are welcome at firstname.lastname@example.org