Renewed concerns about the durability of the US economic recovery triggered a sell-off on global bourses last week.
A day after US stock markets rallied on better-than-expected quarterly gross domestic product data, US indices posted their worst decline in at least three months. The decline was mainly because of fears about the sustainability of the recovery in the US. These concerns were sparked by economic reports that showed US consumers had cut spending in September. A fresh wave of selling also hit financial sector stocks on reports that Citigroup Inc. was likely to face a $10 billion (Rs47,000 crore) fourth-quarter charge on its deferred tax assets. Since the US financial sector is on a life support system extended by the government, any negative news on US banks triggers a sinking feeling on bourses across the globe.
In the Indian perspective, the fall was triggered by the Reserve Bank of India’s second quarter monetary policy review, which proposed that banks set aside more money to cover potential defaults on commercial real estate loans and raised the proportion of deposits that banks need to invest in government bonds. A weak rupee contributed to a slowing of foreign fund inflows. Corporate earnings, however, were largely better than expected.
Technical factors justified the decline.
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I had mentioned in my last column that if the Nifty breached its strong support level at 4,878 points, sentiment would turn bearish because the market was looking distinctly weak beyond this point. Going forward, important economic data will be released this week. Monthly auto sales figures on Tuesday would be watched very closely and so will be the ABN Amro Purchasing Managers’ Index. Monthly cement sales and steel production figures due later in the week will also help the markets gauge the strength of economic activity in October. Good numbers will comfort the markets and may trigger bargain buying. Globally, the US Federal Reserve’s monthly policy statement due this week could signal fewer liquidity measures for markets while non-farm payrolls data and the Institute for Supply Management surveys on the manufacturing and services sectors will give early indications of how the US economy is faring in the fourth quarter.
Investors are fretful that monetary and fiscal stimulus measures may end soon—one of the reasons for the sharp fall in the previous week. Such fears will continue to haunt global bourses unless the Fed makes a clear-cut statement on the subject. The markets will look closely at the language in the Federal Open Market Committee’s statement expected on Wednesday at the end of its two-day meeting; the statement could serve up signals on the direction of US interest rates.
This week, technically, the market looks weak and there could be more declines. Since the sharp reversal on Friday on late selling distorted the rebound, the chances of a fall are more. The Nifty on its way down is likely to see its first support coming at 4,659 points, which is a moderate level. The next support would come at 4,578 points, which is expected to be very strong support and possibly the bottom for now, with the Nifty is likely to bounce back from here. On its way up, the Nifty is likely to meet resistance at 4,749, 4,854 and 4,912 points.
In terms of the Bombay Stock Exchange Sensex, there is moderate support at 15,755 points, which if broken, would push the support to 15,691. The Sensex is likely to see very strong support, which would possibly be the bottom, at 15,246. On its way up, the Sensex has its first support at 16,058 points, followed by good resistance at 16,393 points. If this resistance is broken, the undertone would start turning positive. Among individual stocks, Allahabad Bank, Lupin Laboratories Ltd and Punj Lloyd Ltd look good on the charts. Allahabad Bank, at its last close of Rs119.45, has a target of Rs126 and a stop-loss of Rs114. Lupin, at its last close of Rs1,129.95, has a target of Rs1,264 and a stop-loss of Rs1,189. Punj Lloyd, at its last close of Rs202.25, has a target of Rs214 and a stop-loss of 190.
From my previous week’s recommendations, ACC Ltd, Reliance Communications Ltd and 3i Infotech Ltd missed their targets.
Vipul Verma is CEO, Moneyvistas.com. Your comments, questions and reactions to this column are welcome at email@example.com