Index Outlook: Get set for a turbulent patch
LOKESHWARRI SK BUSINESS LINE
The Sensex and the Nifty display weakness, setting the stage for further decline
Investors in the Indian market have been beating a strategic retreat since the beginning of 2019. Foreign portfolio investors have net purchased just $139 million in equity so far this year and mutual funds and retail investors too have been more circumspect.
This cat-on-a-hot-tin-roof behaviour of investors is resulting in a narrow sideways movement in the indices. After being shackled within a range through January, the Sensex and the Nifty attempted to move higher after the Interim Budget, but the rally proved ephemeral and both the benchmarks currently sport marginal losses for 2019. This performance has been in contrast to other global indices, many of which have gained between 5 to 10 per cent since the beginning of this calendar.
With the general election just weeks away, the cacophony of our Netas — charges and counter charges, doles, expose et al — is likely to reach a crescendo, testing the nerves of the investor fraternity sorely.
While many claim that lower inflation, falling interest rates, crude prices and strong growth are conducive for stocks now, there are a pile of negatives as well. Slow progress of cases under IBC, ongoing liquidity crunch impacting consumption, worries on the fiscal deficit front, fears of continued rupee weakness and lower government spend around election are weighing on the stocks at this juncture.
Stock valuation do not support a sharp rally from this point either. Earnings growth for the December quarter has been the weakest in recent times as the positive base effect fades and the optical improvement in banks’ earnings reduces.
It’s therefore best to brace yourself to face some volatility in stock prices. Investors with a long-term horizon can find some good value picks, if market corrects further from these levels.
The Nifty turned distinctively weak last week, recording losses in all the five sessions.
Short-term trend: The Nifty has been in a sideways movement between 10,500 and 11,000 since last November. The short-term trend will turn decisively positive only on a strong close above this level.
For the next couple of weeks, watch out for resistance at 10,800 and 10,926. Reversal from either of these levels will be an opportunity to initiate fresh short positions.
There is an immediate support in the area between 10,500 and 10,550. Recovery above this will keep the 10,500-11,000 range active. Next short-term support is at 10,440. A strong close below 10,400 is needed to make the short-term view negative.
Medium-term trend: Please refer to the index outlook for 2019 published on December 29, 2018, while reading this section. We had referred to a positive and a negative scenarios in the yearly outlook. With the Nifty unable to move beyond the 11,150 level, the second scenario becomes more likely for 2019.
A medium-term peak has been formed at 11,752 in September 2018. If the second wave of this move is completed at 11,118 in February 2019, the third can be quite severe with downward targets of 10,048, 9,387 and 8,725.
If we combine the Fibonacci retracement supports with the e-wave targets, investors need to watch for the support zone between 9,800 and 10,000 for a possible reversal. If this zone holds, the index could continue moving in the wide trading zone between 9,800 and 11,000 until the market stabilises after the Lok Sabha elections. The outlook will turn bleak only on a strong breach of the 9,800 area.
On the other hand, the bearishness will dissipate on a rally above 11,150. That will once again pave the way for a move towards 11,700 or 12,000. The most likely scenario is a drift lower towards the 10,000 zone, with the election result determining if the index will head below 9,000 or move back above 11,000.
The Sensex too has turned very weak since the second week of February. Inability on its part to move beyond the 36,800 zone decisively means that the index can move lower to 33,682, 31,525 or 29,367 as the third wave from the 38,989-peak unfolds.
Presence of the Fibonacci support around 32,600 will make the zone between 32,600 and 33,600 the critical level to watch in the run-up to the elections. But an adverse result in the election could make the index move lower to the next targets indicated above.
The medium-term view will be salvaged if the index manages to clamber above 36,800 and close above it convincingly. Such a move will pave the way for a rally towards 39,000 again.
For the week ahead, the Sensex will face resistance at 36,120 and 36,156. Supports for the week are at 35,375 and 35,010.
Bank Nifty (26,794.2)
The Bank Nifty had a stronger run in the last quarter of 2018, but it seems to be stuttering around the resistance at 27,500. A strong close above this resistance is required to make the medium-term view positive for the index and take it to the previous high of 28,379.
But the bias is currently negative in the index. Immediate supports are at 26,420, 26,019 and 25,591. The medium -term view will turn negative on a fall below 25,591, paving the way for a decline towards 24,250 next.
Global markets have managed to move higher since the start of 2019 even as worries over slowing global growth and trade war fears continue to cast a shadow. The Federal Reserve deciding to go slow with its rate hikes and the fall in crude prices seem to have provided a breather.
The European indices such as the DAX, the FTSE and the CAC were subdued due to the messy progress of the Brexit, but the Dow Jones Industrial Average managed to roar back strongly this year, gaining almost 10 per cent since the beginning of 2019. The Dow now appears set to move towards its October 2018-peak of 26,952.
The strength in US dollar index will determine performance of EMs in the year ahead. The dollar index fiaces resistance at 98. Break above this can take itto104, which will be bad for the rupee as well as Indian stocks.
Published on February 16, 2019