WEEK AHEAD

 

Market may remain volatile

 

Concerns about corporate governance standards at Indian firms may continue to weigh on Indian stocks in the near term. A government probe into the telecom spectrum allocation spooked the market, with investors dumping shares of firms which are perceived to have weak corporate governance standards. The Q3 result season is almost over and the focus will now shift to expectations from the Union Budget 2011-2012 to be presented by the finance minister in parliament on 28 February 2011.Bargain hunting helped the Sensex recover from 8-month low on Friday, 11 February 2011.

 

 

WEEK

14-02-11 to 18-02-11

 

NIFTY RANGE

5200-5500

 

CRUCIAL

SUPPORT 5260 & RESISTANCE 5410

 

APPROACH

Should not overstay the welcome on the upside

 

STRATEGY

It is a wait & watch for now, with a positive bias.

 

MARKET TREND

A technical bounce on the card over the coming weeks

 

MARKET OUTLOOK

A short-squeeze is what can bring about some spurt.

 

FACTORS

Corporate Governance, Global Cues & Fund Flow

 

IMPORTANT

There is no reason to be overexcited

 

 

Ø   OUT-LOOK:

 

The turmoil in the market continued this week though Friday saw some pullback. The 265 point gain for the Sensex on Friday came despite industrial growth slowing even further to a dismal 1.6 per cent in December, 2010, from 18 per cent in the same period a year ago. The main culprit was the poor performance of the manufacturing sector.

 

The recent CBI arrests in the telecom probe made matters worse for the bourses during the week. However, according to advance estimates released by the government, the Indian economy would grow by 8.6% in this financial year against a survey of 8%. The December Industrial Production fell to 1.6% as against 2.7% in November.

 

Investors will hope that the recovery continues for some time. A short-squeeze is what can bring about some spurt.

 

Ø   ROAD AHEAD:

 

So as we have been discussing for the last couple of days, having fallen so much we may have just come to the levels where the market is finding support and some of that momentum on the way down seems to have spent itself. So it's conceivable that over the next few days and may be even a next few weeks the market works with this as a base - 5200.

 

Hope we don't speak too soon and then try and get into some kind of a trading range before the budget - may be it's between 5200 and 5400-5500. So not too much by way of upside, but at least downsides get restricted around this 5200. That you should expect given the ferocity of the fall, the capitulation that we have seen earlier this week.

 

So even if the market has to seek lower levels eventually its never usually in a straight-line and may be that straight line momentum has exhausted itself over the events of the last one week.

 

Ø   STRATEGY:

 

The Nifty has hit 5200. This was level that we have been advocating throughout the last few weeks and we have been able to project the trend quite accurately... again. This is a time for us to step back a bit and observe what the next move would be. The possibility of a short term pull back look quite bright at present as medium term technical are reading at extremely oversold levels. This can result in a technical bounce over the coming weeks. However, a major trend reversal may be some time into the future. The Midcap index did reach below the 7300 level. It is a wait & watch for now, with a positive bias.

 

Ø   APPROACH:

 

There is no reason to be overexcited. Infra stocks have come back because everybody was on the same side - the sell side. Broadly, we would keep seeing 5200-5350 on the Nifty in next few days. The biggest indicator is that you have 2-3 point premiums in the futures, which means there is no great build up on the futures side.

Some people are covering their short positions because the market is finding some difficulty to go below 5200. So, some sideways move may happen, but you should not overstay the welcome on the upside because sustainable rallies will be difficult to come till we spend a lot of time in a range.

 

Ø   CHART PATTERN:

 

·   TREND CHANNEL: The Nifty has made a trend channel since October 2009. After falling back into the channel, the Nifty reached its lower support level of 5200. This was as per our expectations. The Nifty has received support at the lower channel line and this can lead to a technical bounce back.

 

·   OSCILATOR: The short / medium term oscillator (Stochastics) has hit oversold levels. This diminishes the odds for the index to decline further. This too suggests that a bounce back could be expected.

 

·   OUT-LOOK:  The medium term chart of the Nifty has taken support at a perfect technical level. Indicators too are at oversold levels and do not suggest further bearish odds. We can expect the Nifty to make a short term bounce from current levels. It is a wait & watch as far as medium term trends are concerened.

 

Ø   Q-3 EARNING:

 

The results announced so far showed that the combined net profit of a total of 2,535 firms rose 21.6% to Rs 84245 crore on 19.5% increase in sales to Rs 836684 crore in Q3 December 2010 over Q3 December 2009.

 

Shares of aluminum and copper major Hindalco Industries and Reliance Capital will react to Q3 December 2010 results when trading resumes on Monday, 14 February 2011. These two companies are due to report Q3 results on Saturday, 12 February 2010. On Monday, 14 February 2011, Reliance Infrastructure (R-Infra), Reliance Communications, Reliance Power, Tata Power, Coal India and Unitech are due to report Q3 results. The board of R-Infra will consider buyback proposal along with the results. Steel giant Tata Steel reports Q3 results on Tuesday, 15 February 2011.

 

There are concerns of slowdown in corporate profit growth going ahead. With the rise in key policy rates by the Reserve Bank of India (RBI) recently, interest cost will only rise in the coming quarters that could hurt earnings going forward. If raw material costs keep rising at a fast clip, companies will feel the heat of slowing sales growth and rising cost of operations that could start eating into profit growth.

 

Ø   CORPORATE GOVERNANCE:

 

Concerns about corporate governance standards at Indian firms may continue to haunt Indian stocks in the near term. The Central Bureau of Investigation (CBI) widened its probe in 2G scam with the arrest of Shahid Balwa, managing director of DB Realty and vice chairman of Etisalat DB, the venture between DB Group and Abu Dhabi's Etisalat on 8 February 2011. Balwa's counsel contended that the company of his client was being singled out and he was being made "scapegoat" despite the involvement of more firms in the case. DB Realty has said that its chief has been wrongly implicated in the case and is not involved in anything ''illegal''. The company has said that Balwa will strongly contest the CBI charges.

Swan Telecom and Unitech Telecom had together caused a loss of over Rs 7000 crore to government exchequer as both had offloaded their shares for hefty sums after getting the 2G spectrum, according to CBI. In a five-page FIR, CBI said the officials of the Department of Telecom and some private companies entered into a criminal conspiracy and caused wrongful gains to themselves. DB Group sold a 45% stake in Swan Telecom to Etisalat after the operator was granted a licence. Swan Telecom has since been renamed Etisalat DB.

 

The Comptroller and Auditor General of India's (CAG) report in November 2010 said rules were flouted when telecom licences were awarded, which led to many ineligible firms winning licences. Telecoms minister A Raja was sacked soon after the report was released. He was arrested this month on charges of misuse of ministerial office and criminal misconduct.

 

Ø   MACRO FRONT:

 

On the macro front, the government will unveil data inflation based on the wholesale price index (WPI) for January 2011 on Monday, 14 February 2011. Inflation accelerated to 8.43% in December 2010 from 7.48% in November 2011. Inflation for October, 2010 was revised upward to 9.12 % from 8.58% as the provisional figures reported on 15 November 2010.

 

Ø   UNION BUDGET:

 

The next major trigger for the stock market is Union Budget 2011-2012 to be unveiled by the finance minister Pranab Mukherjee on 28 February 2011. Investors will watch if the Finance Minister announces measures to rein in inflation and inflationary expectations. The Finance Minister may announce a new road map for the Goods & Services Tax (GST). The original deadline of 1 April 2010 for roll-out of GST has already been missed due to the lack of consensus between the Centre and states on the issue. GST is India's most ambitious indirect tax reform plan, which aims to stitch together a common market by dismantling fiscal barriers between states.

 

The government may also announce some populist measures in the Budget given that assembly elections are due in Kerala, Tamil Nadu, West Bengal and Assam. In all these states, the Congress is potentially looking to regain power or to retain it.

 

Ø   GST:

 

The Centre has reportedly sent the empowered committee of state finance ministers yet another draft constitutional amendment on the proposed goods & services tax (GST) in a last-ditch attempt to reach a consensus before the Budget session of Parliament. The third draft reportedly proposes the creation of a GST Council through an Act of Parliament, instead of presidential order, as proposed in the previous draft.

 

Ø    COMMODITIES:

 

In line with our view, metal prices have consolidated for the major part of last week. Copper and Zinc look set to target higher levels. Aluminium is trading sideways and is a wait and watch for now. Gold and silver are attempting to move higher, although Silver looks stronger as compared to Gold. Crude can see further weakness below the level of $87.50.

 

Ø   CURRENCIES:

 

The up-move in the USD/INR may continue and it can target higher levels closer to 46.00. EUR/USD is trading sideways and we prefer to wait and watch. Trend of USD/JPY looks good for a target of 84.50

 

Ø   SECTORIAL WATCH:

 

·   CNX DEFTY: The weakness in the medium term momentum persists. The Defty declined below 4000 as we had expected. However short/Medium term indicators have hit oversold levels and a bounce back can develop. It is a wait and watch as we observe this bounce-back.

 

·   BSE PSU: BSE PSU has remained weak in line with our view. Medium term indicators are looking oversold and a technical bounce can be expected.

 

·   BSE BANKEX: Banking index breached the 11800 level as per our projected view. Technical indicators have become oversold and this can result in a minor recovery.

 

·   BSE IT: A sign of weakness in the IT index still persists. Support of 6000 is important however, below this it can see an acceleration of its downtrend.

 

·   BSE CAP GOODS: In BSE Cap Goods index our target of 12400 has been achieved. However, oversold signals are emerging in this index too. As such, a short term recovery can be expected.

 

·   BSE AUTO: BSE Auto Index has also achieved our target of 8200. Oversold signals point to the possibility of a halt in the downtrend. This can result in a consolidation of the trend.

 

Ø   GLOBAL WATCH:

 

·   S & P 500: S&P500 continues to make new 52 week highs. However, its uptrend may be losing its momentum. We prefer to follow the uptrend with some trend tracking stop loss from here. A decisive move below 1295 may lead to weakness in the trend.

 

·   BOVESPA: The short term trend in Bovespa is weak and can produce some more decline. Next support to watch out is 64000 followed by 62500.

 

·   SANGHAI SSE COMPOSITE: SSE crossed 2800 level and has gained some short term strength. The continuing uptrend can see it come closer to 2870 and beyond. Support is expected to come around 2750 levels which is its 200 DMA.

 

·   HANG SANG: The HSI is in a downtrend and support could come at 22400 which is also its 200 DMA. Only a break below this level can lead to further acceleration of the downtrend.

 

·   NIKKEI: The Nikkei still looks good for higher levels. Upside levels to watch out are 10700 and 10800. The overall trend of recovery remains in force and good support will come around 10500.

 

·   FTSE: The FTSE remains sideways but with a hesitant note. We do not see this as much of a strength. Good support will come at 5970 level.

 

·   MSCI EMI: The MSCI EMI continues being weak and can see further declines closer to 1075 level. The downtrend is looking quite strong and a move below 1070 can drag the index further.

 

Ø   EVENT CALENDER:

 

DOMESTIC:

 

·   14/02/11 Monday : Monthly wholesale Price YoY

·   17/02/11 Thursday :  Food Articles WPI YoY Feb 5

·   17/02/11 Thursday : Primary Article Feb 5

 

GLOBAL:

 

·   15/02/11 Tuesday : Empire Manufacturing Feb 11.92 15

·   16/02/11 Wednesday : US- ABC Consumer Confidence Feb 13 -46 -

·   16/02/11 Wednesday : US- Housing Starts Jan 529k 537k

·   16/02/11 Wednesday : US - Industrials Production Jan 0.8% 0.6%

·   17/02/11 Thursday : US- Initial Jobless Claims Feb 12 383k 400k

 

 

 

IN-A-NUTSHEL:

 

Despite Nifty achieving our downside target, the technical view on the benchmark would continue to be negative until we see a negation of the lower-top lower-bottom formation on the daily chart, which would happen only if Nifty were to decisively cross the immediate previous top of 5560. Before that the downward sloping trend line adjoining tops of 52th January and 4 February will present a resistance around 5370. Traders are advised to lighten trading long positions around 5370 and take a fresh view if Nifty sustains above this level. On the downside, a breach of 5180, the low made on Friday, would be indication of extreme weakness in Nifty and we would not be surprised if Nifty plunges all the way to 4800 subsequently, which happens to be the 38.2% retracement level of the entire rally from the bottom of 2252 to the top of 6338.