The Hindu Business Line : Sensex may test support levels

NERVOUS MOMENTS: The expression of the crashed market is vivid on the face of a share trader in Mumbai on Friday. The BSE Sensex had crashed by 258 points - Paul Noronha

Suddenly negatives have piled up to take wind out of the Sensex sail. Last week, market did try to reach 11K, but could not sustain as the sentiment turned negative.

As if rain induced inaction on the stock market was not enough, turn of direction in the divestment process and tension in Maharashtra have cast a shadow over the consolidation phase on the Dalal Street.

This week, market players may tend to recoil amid increasing confusion and test the intermediate support level on the benchmark index at around 10K level.

Crude - the spoiler

Will an upward revision in Infosys guidance, scheduled on July 12, cheer up the market again? It's a difficult call. The near-term uncertainty has also been fuelled by global crude oil price moving upwards.

Observers feel that the proposed freedom to the oil marketing companies in scaling up retail prices (if the imported crude basket's average cost crosses $70 a barrel) may not eventually be allowed in view of differences of opinion within the UPA Government.

Even if substantial outflow do not take place, market liquidity is likely to remain low and caution would take better of aggression. The corporate earning reports, in general, are expected to be average-to-below-average in the backdrop rising input cost, interest rate and depreciation cost (as many have already gone in for substantial capital expenditure).

In the low-interest and low-inflation regime between 2000 and 2005 (calendar year), aggregate net margin for 200 top Indian companies had gone up from 6.1 per cent to 10.1 per cent. There is a growing market consensus that 2006 may produce lower net margin growth.

Though auto & auto ancillary sector and cement have been performing better in physical sales terms, it is apprehended that the sector players are losing pricing power.

Only metals sector still retains some pricing power. However, in the coming quarters things may not be easy for the metals producers too.

Losing steam

On the other hand, after producing positive surprises in terms of GDP growth projection for the current fiscal and a current account surplus, the economy seems to be losing growth momentum in the medium term. The spread and intensity of monsoon is also not enough to enthuse the market to take a bullish call.

Even though long-term outlook for India has not been impaired, long-term investors are likely to remain patiently waiting outside the ring, at least for the time being.

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