Index Outlook: Bulls regain their mojo

The bull brigade, fortified by the thumping victory of the BJP in Uttar Pradesh and Uttarakhand, took stock prices to record levels last week. The Nifty managed to close above its previous life-time high on Friday and the Sensex is just 376 points short of its all-time high peak.

While you are enjoying the ongoing party in the market, make sure that you do not get too carried away. Bullish sentiment typically surges near market peaks and many mistakes are made at these levels. The Nifty and the Sensex have been in a consolidation phase since March 2015, when the previous life-time high was recorded. Since the indices seem to be on the verge of a long-term trend change, it will be best to watch the index movement over the next two to three more weeks to confirm this break-out. Then, the bulls can start feeling really indomitable.

Indian markets have been surging since the beginning of this year, with the Sensex and the Nifty up 12 per cent YTD. The nebulous recovery in January was strengthened by a sober Budget and strong show by India Inc in the December quarter.

As we have been reiterating, while valuations are not cheap at these levels — Sensex FY 18 PE at 16 times — valuations are not in the bubble territory yet. Domestic environment is conducive for a good earnings growth in FY-18 too. Risks of a correction triggered due to external events however remain.

That said, global investors too seem in an overtly exuberant mood currently, taking the 25 bps rate hike by the UD Federal Reserve in their stride last week. The optimists are now beginning to argue that rising interest rates are good for stocks; the S&P 500 has risen in periods when interest rates rose and vice-versa.

Foreign portfolio investors too have been gung-ho about Indian stocks in recent times, net purchasing $2.5 billion of Indian stocks in March so far. They have net purchased $3.87 billion worth of Indian stocks in 2017.

The key determinant of global fund flows is the US dollar and it will pay to watch the dollar index in the days to come. Weakness in the dollar index indicates increase in risk appetite that can propel more funds towards risky emerging market assets, including India. On the other hand, rising dollar index has been accompanied by global sell-off in emerging market equities.

The 8 per cent rally in the dollar index from 95.9 to 103.8 between November 9, 2016 and January 3, 2017 was the when Indian markets took it on the chin with the Nifty collapsing 9 per cent in that period. The strength in the Nifty since the beginning of this year is accompanied by weakness in the dollar index.

Another factor that investors need to track is commodity prices. The CRB index has declined 6 per cent since January 20, 2017. As a net commodity importer, this is good news for the country; and for profitability of companies too.

The sharp surge on Tuesday helped the Nifty close the week with gain of 225points.

Short-term trend: The short-term trend in the Nifty is undoubtedly up. It’s best to buy in declines as long as the index trades above 9,060, the ceiling of the gap formed on Tuesday. The gap between 8,965 and 9,060 needs to be closed to signal the reversal of the short-term trend. Next support that needs to be watched, if correction sets in, is 8,860.

Short-term targets for the index are 9,286 and 9,353.

Medium term trend

The first upward target of the up-move from the March 2016 low is 9,217. That target was achieved last week. Next target, if the rally sustains is 10,037 and after that — 10,854. So, it’s quite possible that the Nifty value could move in to 5-digits this calendar.

But since the Nifty has been in a breathless rally since the beginning of this calendar, a correction is overdue and can take place any time.

Correction targets are 8,900 and 8,700. The medium-term outlook will be positive as long as the index trades above 8,700. Next supports are at 8,650 and 8,400. You need to throw in the towel only on a close below 8,400.

The Sensex too had an almost unimpeded run this week. The large gap in the daily chart, formed on Tuesday, between 29,076 and 29,356 will be the critical short-term support that needs watching. Short-term corrections that end in this zone can be a buying opportunity with a stop loss at 28,800. Short-term targets for the Sensex are 30,024, 30,197 and 30,502.

The medium-term trend is up but it will turn very buoyant if the Sensex goes on to close above 30,000. It’s obvious that the third wave from the low of 22,494 is currently in motion. This wave has the targets of 29,821, 32,455 and 36,404.

Since the Sensex is close to the first target, some caution is required. Once these levels are crossed, the path to 32,00 will be clear. Medium-term support to watch is at 27,400.

Global indices appeared unfazed by the Fed’s decision to hike rates and many indices closed with strong gains for the week. The DJ Euro STOXX 50 closed at 3,448, almost 1 per cent higher, supported by the DAX, FTSE 100 and the CAC. Most Asian Indices also managed to inch higher.

The US market that had been racing higher since the victory of Donald Trump has cooled down somewhat.

The Dow Jones Industrial Average hit the high of 21,169 in early March and is in a mild correction since then. But even if a serious correction starts, the index has strong support close to 20,000. The medium-term trend will reverse lower only if this level is breached. Corresponding support in the S&P 500 is at 2,250.

The CBOE volatility index closed near the lower end of its range at 11.28 implying that the mood among market participants has once again turned quite sanguine.