Index Outlook: Climbing a wall of worry

Both the Sensex and the Nifty have been surging, gaining almost 10 per cent since the beginning of this calendar. With the indices moving close to the 2016 peak, bullish targets for the benchmarks are once again doing the rounds.

It could however be a good idea to tread with caution as long as the Sensex and the Nifty do not break past their previous peaks of 30,025 and 9,119 convincingly.

While corporate earnings for December quarter were not too badly impacted by the note ban, the impact could unfold in the coming quarters. Global fund flows also have a way of destabilising stock prices.

The Budget presented on February 1 was one of the factors that helped fuel optimism in the market. While there weren’t any doleouts for the corporate sector or for individuals, the Budget appeased everyone due to its thrust on boosting infrastructure spends and consumption. The clever jugglery with growth numbers that resulted in the fiscal deficit at 3.2 per cent of GDP in FY-18 also went down well with analysts.

Global markets have also been gung-ho since the beginning of this year. US markets continue to hit new life-time highs despite the shenanigans of its new President. The central banks have not made too many hawkish statements and markets for now appear complacent. The most significant trigger that supported emerging market equities over the past month was the weakening of the US dollar. This has strengthened the rupee by 2.5 per cent against the dollar. Forex movement needs to stay conducive to sustain the rally.

But uncertainties with regard to policy rate hikes by the Fed and the Brexit remain. Foreign portfolio investors were net sellers in January, pulling out $173million, but they have brought in $300 million in February so far.

The last word on the impact of the note ban has not been written yet. IIP numbers for December show a 2 per cent contraction in manufacturing output in December 2016 compared to the year ago period, in 17 of the 22 industrial groups in the manufacturing sector.

With GDP numbers for FY-18 pegged lower, earnings growth of companies will also be impacted. It would therefore be best to not get too carried away by the rally and chase stocks that are expensive. We stay with our view that the long-term prospects for Indian equity are bright, but speed-bumps are possible in the short term.

The Nifty managed to close higher for the third consecutive week but the star formation in the weekly chart signals need for caution.

Short-term trend: The Nifty moved in a very narrow band between 8,700 and 8,800 over the last five sessions.

Since this comes after the spurt from the low formed on February 1, it will be construed as a pause before the next move higher. Next spurt upward can take the Nifty to 8,895 or 9,000.

Momentum indicators in the weekly chart are signalling a medium-term reversal, which means the index can move higher from these levels. The break above 8,600 also opens the door for a move towards a new high.

Some caution is required around the 9,000 level as a reversal is possible from there. Short-term momentum indicators are also beginning to drop slightly.

But a break above 9,000 can take the index to 9,119 or 9,172. A close below 8,640 is needed to negate the bullish short-term view. That will mean that the index is heading towards 8,521 or even 8,366.

Medium term trend: Towards the beginning of this calendar, the charts were looking pretty bleak with the prospect of a break below 7,500 appearing imminent. But the fact that the index was able to reverse from 7,893 is a positive for the medium term.

The most obvious count here is that the up-move from the March 2016 low is extending to its third wave.

This wave has the first target of 9,217 but it can also terminate around the previous peak of 9,119. The bullish view will be negated if the index dips below 8,250. So that’s the level that needs watching over the next one month.

The Sensex too has managed to stay upbeat since the beginning of this month. The break above the resistance at 27,800 signals the possibility of a move to the previous peak at 29,062.

Short-term weakness can pull the Sensex down to 28,400 or 27,900.

Short-term view will turn negative only on a close below the second support.

Short-term targets for the Sensex are 29,077 and 30,024.

Support that needs watching over the next month is at 27,000.

Global indices have been moving up over the past month despite worries caused by Trump’s policies.

The CBOE volatility index has been moving lower steadily since the beginning of this year, declining below the 10 level, implying that investors are feeling quite complacent regarding the sustainability of the rally.

European indices have also been quite strong with the DAX, CAC and the FTSE moving higher. The US indices have put up the strongest show over the past month with the Nasdaq Composite Index recording a new life-time high of 5,723 last week, managing to break past the important resistance level of 5,200.

The Dow has had a stellar run since President Trump was elected in the US elections.

The index is up 10 per cent since November 9.

The short and medium-term trend in the index continue to be positive and a close below 19,180 is needed to reverse this view.