Both the Sensex and the Nifty are set to end 2012 with aplomb, close to their yearly highs.
The first six months of the year were volatile with the indices staging a sharp rally in January and February only to give it all up by June. But the uptrend that began at the June trough continues to be in place towards the end of the year.
BSE mid and small cap indices that had suffered sharper declines in 2011 gained 38 per cent and 32 per cent respectively. But the long-term trend in these indices continues to be down. If the market turns volatile in 2013, the smaller stocks could see sharper declines.
There is no alteration in the long-term trend we had outlined in the yearly outlook published for 2011 or 2012. To recount, we are assuming that the new cycle of a secular bull market began in 2001. One wave of this cycle ended at the January 2008 peak.
The second wave did not last long but was strong enough to lead to the assumption that the third wave of the secular bull market began in March 2009. In other words, it is highly unlikely that the Sensex will go back to 8047 or the Nifty to 2539 in the coming years. We stay with the first two long-term targets for the Sensex at 39,337 and 58,743 (to be achieved in the next 10 years). This count continues to be valid unless the Sensex closes below 13,000.
The corresponding long-term targets for the Nifty are 12,718 and 19,011. The long-term outlook will have to be altered only if the Nifty closes below 4000.
We had discussed an alternative count as well last year, the possibility of the move from 8047 in Sensex being the fifth of the long-term impulse wave. In this event, the supports for Sensex stay at 14,775 and 13,044. Nifty’s supports are at 4436 and 3916. According to this count too, the downside over the long term could be limited to 13,000 on the Sensex and around 4,000 on the Nifty.
The first part of the third wave from 8047 in the Sensex ended at the November 2010 peak of 21,108. The second part of this wave appears to be unfolding currently. The pattern thus far suggests that instead of being fast and deep, it will be long-drawn and shallow. We are already two years into this corrective move and it can easily extend for a year or more.
That sets the long-term trading range of 15,000 to 22,000 for the Sensex and between 4,500 and 6,500 in Nifty.
In other words, 2013 could be more volatile than 2012. Sensex and Nifty could move on to new life-time highs, but it would be best to tread with caution at such times. There is the possibility of the indices reversing lower and going into sharp declines too.
We are not very clear on the pattern that the index is currently forming, but the indices could form a higher bottom in the next leg of the decline. Sensex could halt its decline around 17,000 and the Nifty around 5,000. Declines would, therefore, provide stock-picking opportunities for the long term.
The range for 2013 for Sensex is between 17,000 and 22,000 with outer limits at 15,000 and 31,500. The range for Nifty is between 5,000 and 6,500 with outer range at 4,500 and 8720. We will revisit the outlook during the year if the outer limits are breached.