A non-starter stock markets

A non-starter stock markets

The markets saw the rally I had mentioned in my Monday column Ahead of the Ticker. The rally was extended beyond my first important resistance level of 5,439 points and inched closer to my next resistance level, as the momentum and euphoria about the budget, which to my mind was uncalled for,drove the Nifty index of the National Stock Exchange to a high of 5,477 points.

However, since these levels were expected to see profit selling technically, the markets came off these levels with good volumes, clearly suggesting that the budget proved to be a non-starter for the stock markets.

Although the budget was good from a macroeconomic perspective and is likely to boost growth in the economy, it did not have much to be a trigger for the stock markets, which has been languishing for several weeks now. But that’s okay, as budgets are, after all, made for the economy and not the stock markets.

Proposals related to the hike in direct tax exemption limit, lowering of surcharge on corporate tax and holding of the excise duty rate were on expected lines. Thus, despite being a positive for the stock markets, they did not help much apart from the instant push.

The proposal to allow foreign funds to invest in mutual funds was a welcome step, which would boost the depth of the Indian stock markets. However, since the fine print related to this proposal is yet to be read and analysed, it is difficult to build euphoria around it.

Moreover, it is not certain whether this move would actually increase the allocation by foreign funds for India, or it would be the same allocation now finding its way into mutual funds as well. Thus, there is actually a lot to be seen before considering it as a trigger for the stock markets.

The other big factor was lower-than-expected fiscal deficit target, which calmed market fears and put to rest some harsh opinions about the government’s finances.

However, the markets were hoping for more from the finance minister in terms of path-breaking announcements about reforms, foreign direct investment, etc., which the finance minister did not address.

In view of the fact that the budget fell short of the markets’ expectations, my analysis suggests the euphoria about the budget has already ended and the markets would be back to the same old situation they were in on Friday.

Chances of a post-budget rally look remote, indeed the possibility of resumption of the downtrend would increase over the days.

Technically, I think the markets would likely resume lower on Tuesday, with key support for the Nifty now coming at 5,305 points. If on Tuesday the index breaks past this level with good volumes, then it would be a sign of weakness on the bourses. This is likely to push it down further to 5,231, which will be a crucial level to watch, as a fall with good volumes or a close below this level would be a sign of further weakness on the bourses.

The next stop for the Nifty would be expected around 5,167, which could see some bargain hunting or mild consolidation. However, I do not think this level could be called the bottom, as despite being a strong support level, it is not likely to hold for long and any volume-driven fall could push the Nifty below this level too.

If this happens, it would be a bad sign for the markets. The breach of this level would mean more weakness, with the next support coming at 5,093, which is again a moderate support level and may not offer a strong base for the falling Nifty. The bottom, as of now, looks at 4,967 points, which should hold even in a bad global situation and should offer a strong base for the Nifty.

On its way up, the index would continue to remain under pressure unless it breaks above 5,557 with good volumes and closes above it. If the Nifty does close above this level, it would be a good sign and the market outlook in this case would turn positive.

To sum up, my view on the markets is negative and I expect weakness. My view about weakness would hold unless the Nifty closes above 5,557, as above this level the markets will have a positive outlook.

But on the downside, the chances are that the Nifty could drift lower and find the bottom at around 4,967. Although it is not necessary that the Nifty touches this bottom, technically it is a possibility that cannot be ruled out.

Vipul Verma is CEO, moneyvistas.com