Index outlook: Bears on the back-foot

The second quarter of 2015 has begun on a buoyant note for global equity markets. This was mainly due to weak jobs data in the US that gave investors the rope to hope that the Federal Reserve will postpone its decision to hike interest rates.

The surge in optimism was enough to pull stock prices back from the brink.

The gloom that set in with the ides of March is now forgotten. Yes, the dollar is still near its recent peak; crude prices are struggling to move higher; the Fed is firm that it will begin monetary policy normalisation (read hike interest rates) soon, and the fourth quarter earnings of Corporate India is going to be dismal. Yet, the Sensex gained 600 points and the Nifty 200 points last week.

The irrationality is not restricted to Indian markets. Most global markets seem to have ended their short-term correction and are now close to record highs. This sudden turnaround is going to put bears — holding short positions — in a spot. If they begin squaring their positions, it will provide further impetus to the rally.

Indian investors remained cheerful through last week despite Raghuram Rajan refusing to pander to their wishes in the monetary policy. The Governor maintained status quo in the policy while chiding banks for not passing on the cuts in policy rates to customers. Investors also cheered Moody’s revising India’s sovereign rating to positive from stable.

The reaction to the strong industrial production numbers for February announced after market close on Friday will help stock prices move higher on Monday morning.

The IIP growth was 5 per cent in February compared to the same month last year while the cumulative growth for the April to February 2014-15 period was 2.8 per cent.

A data-heavy week is ahead of us. The consumer price inflation as well as the wholesale price inflation numbers will be unveiled in the early part of the week. Trade balance numbers will also be of interest, especially export growth.

The fourth quarter earnings of India Inc will start rolling in slowly next week, creating pockets of activity.

Foreign portfolio investors have turned buyers in equity markets again.

They have purchased stocks worth $383 million in April so far. Their tally for 2015 is $6.3 billion of net purchases in stocks and $6.8 billion of debt.

Sensex (28,879.4) The Sensex continued its upward march and managed to draw close to the 29,000 mark.

The week ahead: The Sensex managed to hit the intra-week peak of 28,907.8 and moved slightly above the 50-day moving average line. While this is a positive, investors need to stay cautious as it is poised just below 29,000 — the 61.8 per cent retracement of the previous decline.

Reversal from this level can drag the Sensex down to 28,280 or 27,902. Investors can buy in declines as long as the index trades above the first support. Short-term trend will reverse lower on a close below the second. If Sensex continues moving higher, next target is the recent peak of 30,024.

Medium-term trend: As discussed earlier, weakening momentum in the weekly charts implies that the medium-term trend is on the verge of reversing lower. The Sensex too has been moving sideways since last December that could be a medium-term distribution pattern.

But if the Sensex manages to get past 29,000, it will mean that the distribution is yet to complete and the Sensex could make yet another move beyond 30,000 before it ends. The week ahead should give us better cues about the medium-term trajectory.

Nifty (8,780.3) The Nifty too has managed a close past its 50-day moving average line.

The week ahead: While the index moved above the first resistance at 8,600, it is currently hovering just below the second resistance at 8,800. This is a critical juncture as it occurs at the 61.8 per cent retracement of the slide from 9119-peak. The negative short-term outlook will mitigate once Nifty moves above this level. On the other hand, failure to move above 8,800 will mean that there is the possibility of the third leg of the move from 9,119-high unfolding, that can drag the index lower to 8254 or 7937.

Short-term supports for the week are at 8,600 and 8,480. Fresh buying is not advised on a decline below 8,480. If the index manages to move up next week, it will head to the recent peak at 9,119 level.

Global cues Global markets surged strongly last week with most benchmarks at record highs. The DJ Euro STOXX 50 closed at a new multi-year high buoyed by the strength in European benchmarks including the CAC and the DAX. The CBOE volatility index, the fear gauge, closed at the lowest level in the last four months as investors’ pessimism waned.

The Dow held above the short-term support at 17,500 and bounced strongly to edge close to its previous high at 18,288. Next upward target stays at 18,830.

Many Asian and other emerging market indices too recorded a strong close last week. Philippines’ PSE Composite Index, Shanghai Composite Index and the Hang Seng surged to multi-year highs.

Correction

This copy was corrected on April 12, 2015. An earlier version said the Nifty is currently hovering just below the second resistance at 8,700. The second resistance figure should be 'at 8,800'.

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