The downtrend continued on the stock markets, a sharper-than-expected drop in the country’s October industrial output compounding concerns over slowing economic growth and triggering panic among investors. Industrial output contracted for the first time in more than two years in October as waning consumer demand took its toll. Production contracted 5.1%, far worse than the market forecast of a marginal drop.
Last week, India sharply cut its economic growth forecast for the current fiscal to between 7.25% and 7.75% from its original 9%. November inflation accelerated 9.11% from a year earlier, remaining above 9% for 12 consecutive months despite 13 rate increases by the Reserve Bank of India (RBI) since March 2010.
Inflation was high enough to prevent RBI from softening its stance on interest rates immediately despite concerns over slowing growth. In its policy review meeting on Friday, RBI kept key interest rates unchanged, signalling rates would be cut if the pace of inflation subsides. Even the advance tax numbers, which were released during the middle of the week, were uninspiring and did not offer much cheer. Clearly, the chronology of events was strong enough to keep the pressure on the stock markets, which saw benchmark indices decline by about 4.5% over the week.
Illustration by Shyamal Banerjee/Mint
Globally, investor sentiment turned cautious after a summit meeting last week raised concerns about the effectiveness of the euro zone rescue plan. Concerns were further elevated after ratings agency Fitch warned of the risk of recession in Europe. Another bombshell was dropped by Fitch on Friday when it warned of a possible downgrade of France and six other euro zone countries—Belgium, Cyprus, Ireland, Italy, Slovenia and Spain. Though a rating downgrade of France is not imminent, it could be a possibility in two years. For the others it could be a reality in about three months, which is likely to complicate the situation further.
In the meantime, US economic indicators were all surprisingly positive. Right from jobs data to retail sales to the Consumer Prices Index, all indicators fanned optimism about the world’s largest economy. The US consumer price index, which fell for the month, gives room for the Federal Reserve to provide further stimulus to the economy.
Going forward, there is not much on India’s economic platter this week; globally the holiday mood would dawn as the week progresses and major investors take off for their Christmas holiday. Year-end window dressing may lead to a recovery on the stock markets. However, broader investor sentiment may still remain weak after the benchmark indices break past their support levels. In terms of support and resistance, the Nifty on its way down will come across its first support at 4,612, which is moderate and may not be able to withstand a volume-led drop. In case this support falls, the next logical support would come at 4,521, which is likely to be a strong level. In fact, my analysis suggests there could be a relief rally or good gains around this level. However, if this level goes, the base of the market would then shift to 4,342 points. On its way up, the first resistance is likely to come up 4,734, which is likely to be an important level. This level should be watched closely as it will be crucial for market sentiment. If the Nifty settles above this with good volumes, it will be the first sign of a return of positive sentiment in the immediate term. If this level goes, the next resistance would be 4,821-4,842 points. This level will also be an important one as it may see some consolidation and profit selling.
Technically, I am seeing a rally in the Dow Jones index, which might support the recovery on the global bourses, including India. Dow Jones (last close: 11,866.39) has a strong resistance at 11,969, which is likely to be broken soon. If this level breaks, the Dow might rally to 12,110. It might technically be a good idea to hedge positions with the Dow. US housing data will continue to dominate sentiment with housing stats due on Tuesday, existing home sales data on Wednesday, building permits and home sales data on Friday. Apart from weekly jobless claims, final third quarter gross domestic product data would also be released on Thursday, while durable goods order data will be out on Friday.
This week, Kotak Mahindra Bank Ltd, Hindalco Industries Ltd and Oil and Natural Gas Corp. Ltd (ONGC) look good. Kotak, at its last close of Rs481.55, has a target of Rs489, and a stop-loss at Rs469. Hindalco, at its last close of Rs125.90, has a target of Rs130, and a stop-loss at Rs119, while ONGC, at its last close of Rs250.30, has a target of Rs257, and a stop-loss at Rs240.
Last week, Aditya Birla Nuvo Ltd met its target, while Bharat Forge Ltd and Lupin Ltd failed to meet their targets and are valid recommendations.
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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