Index Outlook: Sell in May and go away?

With the Sensex up 14 per cent from the February low, many investors would be wondering if it is the right time to follow the market adage, ‘sell in May and go away’. If you belong to that group, trash the thought.

It is true that May has been one of the worst months for Indian and global stock markets; remember May 2004 and 2006? The period between May and October has also been less lucrative in most years compared to November-April. But if you are a long-term investor and have been buying in the market decline, there are many reasons why you need to continue holding on to your stocks.

One, global risks have reduced considerably since the beginning of 2016. Markets were quaking in their boots in early 2016 at the thought of the Fed increasing interest rates and the fallout of that move. But the Fed has only made one rate hike so far and has recently promised that further hikes this calendar will be ‘gradual’.

While earlier, consensus was veering towards four hikes in 2016, now most analysts expect just two or even no further hikes. It is therefore not surprising that the Dow and the S&P are edging close to their record highs.

Two, crude oil that was plunging into a bottomless pit appears to have made a bottom at $26 in February. While the sustainability of the rally in crude and other commodities is uncertain, the sentiment has definitely improved for the better due to the stability in commodity prices. Fears of a hard-landing of the Chinese economy too seem to have receded considerably.

As far as domestic corporate earnings go, the picture appears bleak in the April quarter. But there could be improvement in the June and September quarter as faster transmission of interest rate cuts due to the implementation of the marginal cost of determining lending rates from April. Improvement in commodity prices will help producers, and consumption will get a boost if monsoon turns out to be bountiful this year.

The drag is likely to be from banks that are still struggling from asset quality concerns. Investment cycle is also unlikely to pick up in the coming quarters, given the stress on infra companies’ balance-sheets. But consumption-related sectors should find the going easier from here if monsoons do not play truant.

Foreign portfolio investors too have turned net buyers in Indian equity after selling heavily in the early part of the year. They have net purchased $1.9 billion of stocks so far this year.

The Sensex and the Nifty 50 are up from their February lows and have the potential to rally another 5 per cent from these levels. But the Sensex could find it difficult to move significantly past 27,000 and the Nifty past 8,300 in the near future. So while the medium-term outlook is turning positive, there could be some choppy movement in the short-term as indices near critical barriers.

Nifty 50 (7,850) The Nifty spent the last week in a narrow range before closing with marginal losses.

The week ahead: The Nifty is confronting multiple headwinds in the short term. The 8,000 level is a psychological resistance that will make many traders nervous and want to take profits. The 200 day moving average at 7,850 is another significant resistance. While the index managed to move above this line in the earlier part of the week, it could not sustain above it and has closed just at this line. The index has also hit the 50 per cent retracement of the fall from 9,119-peak in the Nifty.

The decline is however not deep enough to cause any concern. Immediate supports are at 7,696 and 7,517. Short-term trend will reverse lower only on a strong close below 7,500.

Resistances for the week will be at 7,978, 8112 and 8,254.

Medium-term trend: The medium-term trend for the Nifty is currently up. But a dip below 7,500 will reverse this uptrend. Traders can therefore continue to buy in dips only as long as the index holds above 7,500. Decline below this level can drag the index lower to 7,300 or even lower.

Key medium-term resistance for the index is at 8,260. Ability to move above this level will open the door for a move towards 9,119.

But in our view, that is a little difficult this year. The index is more likely to halt around 8,250 and then spend some time (few months) oscillating between 7,300 and 8,200 before deciding on its next move. This appears to be the most likely scenario for the rest of this year.

Sensex (25,606.6) The Sensex too closed with marginal losses last week.

The week ahead: The Sensex faces resistance at 25,840, where the 200 day moving average is positioned. The index was unable to sustain above this level last week and closed lower. Unless the Sensex manages to close above 26,000 next week, there could be some more downside in the near-term. Downward targets are 25,117 and 24,523. Short-term trend will however reverse down only if the index goes on to close below the second support.

Targets on a move above 26,000 are 26,547 and 27,200.

The 27,200 level is also the key medium-term resistance for the Sensex. The medium-term view will turn bullish only on a strong move above this level.

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