Index outlook: Return of the bull brigade

It has been a buoyant start to the New Year. The bulls, back from their year-end break, seemed determined to continue the party in stock market.

Both the Sensex and the Nifty ended the week with more than 2 per cent gains.

But as we begin 2015, there is a sense of unease on the pace of the expected recovery in economy and corporate earnings.

Most stock prices have run up ahead of the fundamentals, making them rightly, if not stiffly, valued at the current juncture.

The major trigger that everyone is awaiting is the interest rate cut by the Reserve Bank of India. This is expected to boost consumption and kick-start the investment cycle.

It will also provide some relief to our debt-laden companies. Margin expansion due to lower commodity prices is another plus for companies.

The risk to equities largely stems from global factors. Falling crude prices, causing contraction in economies of oil producing companies, can impact our exports and FDI inflows.

The possibility of foreign investors withdrawing funds once the US starts hiking rates and the impact of economic contraction in Europe, Japan and China on our exporters, are other concerns.

Nervousness was evident in other global markets too last week. Volatility returned as concerns on global economic growth resurfaced.

The Institute of Supply Management’s factory index dropping sharply in the US, slower than expected expansion in manufacturing in Euro zone, and a Chinese manufacturing index slipping to the lowest level in 18 months, further stoked these concerns.

But then, hope springs eternal in human hearts.

Investors decided to latch on to the positive fallout of these depressing statistics — the possibility of another round of stimulus in the Euro zone and China and the US postponing its policy rate hike.

That helped indices stabilise in the later part of the week.

Economic data releases last week were mixed. The eight core industries growing at 6.7 per cent in November over last year and HSBC manufacturing PMI at two-year high of 54.5 in November were the positives.

But the burgeoning fiscal deficit and the government’s attempts to salvage it by increasing excise duties on petrol and rolling back excise duty cuts on autos and capital goods does not lend much comfort.

The Sensex moved higher from the low of 27,267 to end the week 646 points higher.

The week ahead: Friday’s surge has taken the Sensex close to the short-term resistance at 27,932 that occurs at 61.8 per cent retracement of the previous down-move. The index has also managed to close slightly above the 50-DMA at 27,730.

The close above 28,000 in the early part of the week will mean that the index is headed higher towards 28,822 and then to 29,381 in the upcoming sessions.

But a reversal in the early part of the week will find the index halting at 27,091 or 26,469. Short-term view will turn negative only on a strong move below 26,469.

Medium-term trend: The movement of the index suggests that we can have one more spurt that takes the index to a new high before a serious decline. The index is expected to move close to the 30,000 level before a serious correction sets in.

This view will be negated on a close below 26,469. Key medium-term support stays at 24,500.

The Nifty too has closed on a strong note on Friday.

The week ahead: The Nifty managed a close above the 50-day moving average but it is halting just below the critical resistance at 8,400. If the index manages to move above this level on Monday, next targets will be 8,550 and then 8,626.

Short-term traders can then buy in declines with stop at 8,250. Supports below this level are at 8,244 and 8,142.

Medium-term trend: The medium-term trend in the index is positive. The rally that commenced last week could take the index to yet another new life-time high. The immediate targets are 8,724 and 8,825.This view will however be negated on a close below 7,961. Key medium-term support stays at 7,600.

It was a turbulent week in global equity markets. Most benchmarks began the New Year on the back foot. CBOE volatility index spiked to 20.1 as the US benchmarks launched into a sharp decline.

The Dow did not make any progress this week and ended 220 points lower. Short-term support stays at 17,200 and 16,700. Short-term view will turn negative only on a close below the second support. Target on a strong break above 18,100 is 19,200.

Many of the Asian benchmarks such as the Jakarta Composite, Karachi 100 and Shanghai Composite Index closed the week on a firm note.

The strength in the dollar index is however a cause for concern. It is currently drawing close to the 2005 peak of 92. If this level is breached, it can move on to 96 or 102.

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