The Hindu Business Line : Pivotals may witness correction

Technically speaking several bearish factors such as the formation of a reversal pattern, negative divergence between the index and oscillators have emerged on the charts of the S&P 500.

THE market was looking for an excuse for correction. The confirmation of differences over ownership in the Reliance group may have provided it with one. But the reaction to the so-called news was a bundle of confusion.

Market players admit that it had been an open secret for some time now on the Street. Also, there is hardly any satisfactory explanation for the delayed response.

Going by the time-tested market practices, one might have sold on such rumour and bought on the confirmation. It is also a fair assumption that this kind of reaction is often quick and impulsive. Is there more to the selling in stocks of the Reliance group on Friday than meets the eye?

In the coming week, there would be endless Street speculation on the group, which may not be good for the sentiment.

One can, of course, argue and justify that market was on a profit-taking mode on Friday and the Reliance group stocks were no exception. On a weekend before the expiry of derivatives contracts, this may have been an over-reaction.

Further, fresh rise in global crude oil price and increase in inflation rate had also dampened the sentiment. Both the Dalal Street key indices saw a reversal in their gaining streak and closed the week marginally in the negative zone.

The soured sentiment also touched the broader market. The S&P 500 index managed to hold on to a small gain of 7.55 points or 0.47 per cent.

On the whole, the market outlook for this week is likely to be one of a correction.

Last week, the FIIs net investment was positive, though lower than the previous week. An overseas fund reportedly liquidated its holdings in the Reliance group stocks. The mutual funds continued to be net sellers in the market.

The overall selling trend in the pivotals may be witnessed this week too. Investors may also follow the profit-taking route for the mid-cap stocks.

Friday's sharp fall in prices coupled with good trading volumes in the cash market and the high level of open interests in the derivatives do not indicate short-term strength.

Technically speaking, several bearish factors such as the formation of a reversal pattern, negative divergence between the index and oscillators have emerged on the charts of the S&P 500.

How will the bank stocks, which bucked the selling trend last week, perform this week? Hardening of interest rate has prompted a revaluation of the stocks. The Bankex with a gain of 5.46 per cent over the week was a clear out-performer.

As banks are testing the housing loan market with rate hikes, the stock market is betting on the earnings growth prospects.

But the current emphasis on the P/E multiples of the banks appears somewhat misplaced. World over, bank stocks are rated on basis on their book values. For various provisioning in the balance sheets, the P/E ratios are not considered dependable tools of analysis for bank profitability. Apart from HDFC Bank and ICICI Bank, no other bank commands a high P/E; a perception has crept in that bank stocks are very cheap. This omnibus treatment may also be in for a correction in the coming weeks, if not this week.

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