Index Outlook: Will it be Happy New Year?

The dawn of every year brings with it the hope that all the wrongs of the previous year will be corrected and this time it will be different. After all it is another year. As we stand at the threshold of 2012, we could do with such optimism and dollops of it.

For things couldn't be messier, locally and globally. Euro zone's debt woes seem to be nowhere close to resolution. Default by Greece, Italy et al is still possible and what that can do to the credit market and global equities is enough to give us sleepless nights. Global economic growth is contracting again. Government is in a policy paralysis. Domestic corporate earnings are set to slow down further. The list of woes is endless.

That said, the drubbing received by Indian stocks in 2011 can be a point in its favour. It could limit the downward risk in the year ahead though chances of a runaway rally are remote. Reversal in interest rate cycle, weakening commodity prices and thriving domestic consumption may be some of the other positives for our stocks in 2012.

When 2010 ended, the Sensex and the Nifty were perched close to their life-time peaks. But despite rest of the global benchmarks recording a strong first quarter, Indian equities decoupled from their global peers to emerge among the worst performing markets in 2011.

FIIs were active in the Indian market but though some months witnessed FII outflows, inflows in other months largely offset this, resulting in net outflow of a mere $357 million. Volumes in cash and derivatives were muted through the year and open interest of futures and options remained below the highs recorded in the last quarter of 2010.

Sensex (15,454.9)

The final week of 2011 was a fractal representation of the rest of the year; it began with hope and ended with a moan. The expiry of December derivative contracts had a part to play in the volatility witnessed last week. The Sensex followed our script, pulling back from 16,000 to head lower.

The index is pausing at the short-term support at 15,500. If a burst of cheer ensues in the New Year, the index can move up to 15,815, 16,049 or 16,300. Short-term view will turn positive only on move above 16,300. Conversely, if the index starts 2012 on a gloomy note, it will mean that the downward move from 17,003 peak has resumed. Downward targets in that scenario are 15,135, 14,894 and 14,580.

The medium-term trend in the Sensex is down and the sequence of lower peaks and troughs since the October 28 peak gives no comfort. But as explained in our previous columns, convergence of targets around 14,500 makes it a reliable support in case stock prices begin hurtling lower. The 17,500 and 18,000 band remains the medium term trend deciding zone.

Nifty (4,624.3)

The Nifty moved slightly higher and reversed down from the peak of 4,800 on Tuesday. The index has short-term support in the zone between 4,600 and 4,650, where it is currently halting. But close below 4,600 will roil the near term view and pave the way for decline to 4,544 and then to 4.450.

If the year starts on a happy note, the Nifty can move higher to 4,726, 4,774 or 4,877 in the upcoming sessions. Short-term view will, however, be salvaged only on close above 4,877.

Medium-term trend is down and the quandary regarding completion of the down-move from 5,099 peak will be resolved only if the index makes an emphatic move below 4,600. The next long-term support at 4,450 will then come in to play. We need a strong move above 5,400 to turn the medium-term view positive.

Global indices

Dow retraced 55 per cent from its life-time high when it recorded the 2009 low at 6,469. A fresh structural bull market is in motion since this trough. After a well-etched five-wave sequence that ended at 12,876, a pull-back is currently on. This correction has support at 10,400. The index tested this support in October but bounced sharply from there. Long-term outlook stays positive though it could spend the next year in sideways move between 10,000 and 14,000.

Benchmarks of many other countries are also pausing at critical retracements after similar five-wave up moves lending credence to the belief that the uptrend from 2009 trough has not reversed yet in the global markets. This can be a supportive factor for our market in the upcoming year.

CBOE VIX, the investor's fear gauge, hit the high of 48 in August 2011, immediately after Standard and Poor's downgraded US sovereign debt. But the last quarter saw the VIX moving below 28 implying that investors in the US are feeling confident about the sustainability of the uptrend in their market.

The same can not be said of European investors. The DJ Euro STOXX 50 recorded the low of 1935 in September this year, that is just 9 per cent above its March 2009 low. It is attempting to stabilise at lower levels over the last three months but this index is not yet out of the woods.

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