Index outlook: Don’t fight the trend

It was a cracker of a Diwali for investors, with the Nifty scaling a new life-time high and the Sensex too ruling at elevated levels. The benchmarks have managed to hold on to higher levels over the last three months, oscillating in a sideways band.

However, the performance of the stock market has been at odds with the fundamentals and has analysts getting increasingly exasperated. Indian Inc reported muted earnings growth in the June quarter and the September quarter is likely to be hit by the GST rollout. Economic growth is slowing with credit growth hitting multi-year lows and private investments showing no sign of revival. While there are pockets of good growth in some sectors, demand for these stocks has taken their valuation to sky-high levels. Price-earning multiple of the Sensex and the Nifty are now edging closer to levels witnessed in 2000 and 2008.

That said, there are no signs of weakness in the charts of Sensex and Nifty currently. While a correction is overdue in Indian and other global markets, stocks can move a little higher before the reversal. Short-term investors should therefore not fight the trend and sell stocks in anticipation of a fall. Wait for short-term supports (Sensex - 31,000 and Nifty - 9,650) to be breached before taking short positions. The nature of the correction is also not easy to forecast. If it is a time-wise correction, there could only be a mild erosion in prices. Even if there is a deep dive, a V-shaped recovery akin to 2009 can bring prices back to their former levels in no time. Investors with a longer horizon can, therefore, continue holding the fundamentally-sound stocks while paring exposure to those that have run up without commensurate improvement in financial performance. The medium-term uptrend will continue as long as the Nifty trades above 9,300 and the Sensex above 30,000.

It needs to be noted that almost all global equity markets have recorded strong gains in 2017 and emerging markets, in particular, have been attracting investors in droves. While there are concerns being raised globally about the shaky fundamentals of this rally, it is really difficult to call a top in such conditions.

Foreign portfolio investors turned net sellers in October, pulling out close to $523 million from the equity market. But they have net purchased $4.6 billion worth of stocks so far in 2017.

Nifty spent the Diwali week moving sideways at its life-time peak.

Short-term trend: The short-term trend in the Nifty is positive since the low of 9,687 recorded towards the end of September. But the index faces resistance in the 10,150-10,250 band. It has already formed two peaks in this zone in August and September. Short-term investors, therefore, need to initiate fresh long positions only on a close above 10,250. That will pave the way for a rally towards 10,544 in the short term.

Inability to move beyond 10,250 can drag the index towards 9,685 again, where it is receiving strong short-term support. Investors with a short-term view can buy in declines as long as the index trades above 9,685.

Medium-term trend: The Nifty is currently in a strong medium-term uptrend that began from the December 2016 low. The sideways move between 9,650 and 10,250 being recorded over the last three months appears to be the fourth wave of this move that can be followed by the fifth and last part.

The upward targets for this final leg of the move from December 2016 are 10,216; 10,544 and 10,921.

The medium-term support that needs to be watched is 9,300. A close below this level will be the signal that the medium-term uptrend has ended.

Target above 10,921 is 11,360.

The Sensex has not made any headway since the first week of August, moving in a narrow band between 31,000 and 32,500. Short-term investors can buy in declines as long as the index trades above 32,500. Key medium-erm support for the index is at 30,000.

A break above 32,500 will mean that the index is heading towards 32,717 or 33,729.

If the rally sustains, it can go towards the next target of 35,070.

Most global indices have been moving higher over the last few months and are now trading at life-time or multi-year highs. Ever since the tension in Korea abated, global equity markets appear to have slid into an equanimous state. The CBOE VIX, the volatility gauge, trades below 10, implying that the sentiment is extremely sanguine.

Recovery in commodity prices is one of the reasons behind the optimism in global market. But the CRB index that captures the movement of commodities, has not made any headway in 2017. The index has been oscillating between 170 and 200 since mid-2016, implying that most commodity prices, including crude oil, seem to have hit a ceiling.

The Dow Jones Industrial Average is in a breath-taking rally since September, up 7 per cent in the last month. With the Federal Reserve’s slow and staggered interest rate hikes not having any impact on liquidity, the bulls are powering on.

A sharp watch needs to be maintained on the dollar index. It is attempting to reverse after testing 91, that is the 50 per cent retracement of the prior up-move. Further decline will take the index towards 88.5. Continued weakness in this index is necessary to keep the money flowing in to emerging market equities.