Index Outlook: Climbing a wall of worry

It is said that stock markets revive much before the economy or company profits. This adage is probably playing out this time too, as stock markets display an indomitable spirit, edging close to their life-time peaks even as economists are busy crawling on the ground trying to spot green shoots.

The resurgent optimism was evident in the stellar upmove in stock prices on Thursday once exit polls indicated a BJP sweep in State elections. The retraction in the later half of the session also needs to be taken note of, since it means that many investors are still cautious and prefer to book profits on rallies.

It was otherwise an up-down-up kind of a week with stock prices first reacting to positive GDP numbers and the expansion in HSBC PMI index. There was a dip thereafter as tapering fears reared their head. Towards the weekend, stock prices surged on cues from assembly elections.

Volumes were nothing to write home about implying that many market participants are sitting on the hedge, waiting out this volatile phase. Open interest in NSE’s derivative segment has moved above Rs 1,40,000 crore. Index put-call ratio declining below 1, however, implies that many traders are betting on the market moving higher.

The week ahead promises to be interesting. Stock prices will react to the actual results of the four State elections. If the exit poll results prove right, the Sensex and the Nifty can move to a new life-time high next week. But if the Congress manages a win in one or two of the States, there can be a sell-off. Either way it will be business as usual after a day or two of volatility.

US unemployment data was very good leading to the Dow and S&P surging higher. That will help in the opening session. Industrial production and consumer price inflation data to be announced next week are other figures that market participants will watch keenly.

The chart of the Sensex and the Nifty are showing marked improvement since a fortnight ago. It then looked as if the Sensex will decline below 20,000 and the Nifty below 5,870 before any possible recovery. But the recovery, over the last couple of weeks, is a positive for the medium-term trend in the Sensex.

Sensex (20,996.5)

When the Sensex declined to the low of 20,137 in November, it had retraced 30 per cent of the upmove from the August low. This is sufficient to qualify as a retracement. The recovery thereafter implies that the Sensex can follow either of these paths over the coming months:

There can be a move to the previous high of 21,321 or thereabouts and then the index can wobble and move back towards 20,000. In other words, the index can spend some time moving in the band between 20,000 and 21,500. This will be construed as a positive consolidation phase.

If the index is in a hurry and breaks above 21,321, it can move on to 22,529.

Medium-term view will remain positive as long as the index remains above 19,850. Subsequent supports are 19,405 and 18,955. Long-term outlook will turn cautious only on close below 18,955.

For the week ahead, rally on Monday will take the index to 21,321. If the upmove continues, the rally can continue to 21,477 or 21,973.

Supports for the coming week will be at 20,770; 20,529 or 20,142.

Nifty (6,259.9)

The Nifty’s move above 6,200 has made the short-term trend positive for the index. Since the index has already retraced about a third of the upmove from the low of 5,118, the movement in the next few weeks can unfold thus:

The Nifty can move to the previous peak of 6,342 and then wobble slightly. There will then be a pull-back to 6,000 or even 5,850. In other words, the index can spend some time in the range of 5,880 and 6,350 before breaking higher.

If the index manages to move beyond 6,342 in the coming weeks, it can then go on to 6,709 over the medium term.

Medium-term view will stay positive as long as the index trades above 5,880. Subsequent supports are 5,735 and 5,591.

In the week ahead, there is high probability of the index declining to 6,180 or 6,103. Traders can buy in declines as long as the index trades above the second support. Strong resistance will be at 6,342 and 6,357. Targets on move above 6,357 are 6,406 and 6,565.

Global cues

There was a sharp sell-off in most global markets last week reversing the medium-term uptrend that has been in place since June. The fear that the Federal Reserve could begin tapering its bond-buying programme was the reason behind this shake-up in the global markets. The CBOE volatility index spiked to a high of 15.7 on Wednesday before closing at 13.7, indicating heightened investor trepidation.

The Dow too, fell to the intra-week low of 15,791 before Friday’s rally helped reduce the losses. But the fact that stocks moved higher on strong employment data means that markets are no more worried about strong numbers from the economy leading to the Federal Reserve advancing its taper programme.

The Dow has immediate support at 15,791 and then 15,624. The short-term trend will be under threat only if the index goes on to close below 15,624. Key medium-term support for the index is at 13,700.

Asian markets, such as South Korea, Singapore and Indonesia, saw sharp sell-offs last week. The Indian markets survived it, thanks to the euphoria following the exit poll results.

Sharp decline in the US 10-year treasury notes and the spike in the yield to 2.9 per cent on Friday imply that bond markets are pricing in a taper soon. The dollar index too, declined to 80.3 on Friday, off its recent peak at 81.58. This is good for the Indian rupee.

COMMENT NOW