Index Outlook: Investors rush back to equities

Equities were back in vogue last week. Once fears of a disastrous Budget that slips badly in meeting fiscal deficit target were laid to rest, investors scrambled back on the equity band-wagon; sending the Sensex and Nifty 50 sharply higher.

The underperformance of the Indian market in the recent global market rally in February could also have led to strong spring-back last week. While other major global benchmarks had lost less than 8 per cent in January and February, the Sensex and the Nifty lost 14 per cent. It is therefore not surprising that the Indian market was a stellar performer last week.

Indian investors were initially not too impressed by the Budget, going by the tepid reaction of stocks in the Budget session. The Sensex and the Nifty lost about half per cent.

But there was an explosive rally in the next session; with benchmarks gaining around 3 per cent. Since the Budget had been careful not to stoke inflation, it was presumed that the RBI will move soon to lower rates further. The central bank, tweaking the tier 1 capital recognition norms for banks, helped buoy sentiments further.

The rally last week is also partly due to a strong uptrend in other global markets driven by crude oil continuing to move higher and signs of strength in the US economy. Sentiment in global markets has swung from extreme fear to greed, going by CNN Money’s fear and greed index.

But we need to see the movement over the next week to determine if this buoyancy is sustainable. Foreign portfolio investors turning in to buyers is a big positive for now. They have net purchased $858 million of Indian equity since the Budget day. Inflows will keep coming as long as the global risk appetite is high. But given the mounting troubles of China and European banks, we have not yet heard the last of global turbulence.

The truncated week could see Indian investors turning their attention towards global developments. The RBI’s next move will also be of keenly watched by all in the days ahead.

The Nifty hit a low of 6,825 as the Finance Minister was presenting the Budget speech. But the rally in the succeeding days helped the index close on a strong note above 7,400 mark.

The week ahead: The Nifty managed to move above the short-term resistance at 7,325. Immediate target for the index is now at 7,600.

Short-term supports are available at 7,250 and then at 7,100. Short-term traders can continue to hold their positions as long as the index trades above 7,100. The near term trend will reverse lower only on a close below 7,100.

Medium-term trend: The close above 7,400 in the Nifty is a positive from a medium-term perspective.

Key medium-term resistance that needs to be watched is at 7,750. Inability to move above this level will keep the contract volatile. Strong move above this level is needed to signal that the index is moving towards 8,000 and 8,270.

The Sensex hit the intra-week low at 22,494.6 on the Budget day before gaining 9 per cent from that low.

The week ahead: The close above the 50-day moving average is a positive for the index. If the week begins on a wobbly note, the index can slip to 23,877 or 23,362 in the days ahead. The short-term trend will turn negative only on a close below 23,362.

Immediate target for the Sensex is 25,000. Since this is also a psychologically important number, close above this level will bolster the bulls greatly.

Key resistance from a medium-term perspective is, however, at 25,500. Failure to move above this level will keep the index wavering between 25,500 and 22,500 for a few more weeks.

Strong rally beyond 25,500 is required to take the Sensex to 26,300 or 27,200.

Global markets raced higher last week, with many indices logging strong gains. DJ Euro STOXX 50 moved above 3,000 signalling that the short-term uptrend is gaining force. The CBOE VIX moved further lower to close at 16.8.

The Dow gained 367 points last week to close at 17,000. As discussed last week, this is a key resistance level for the index. Rally beyond this level will take the index to 18,000 while a downward reversal can pull the index down to 16,400 or 16,100.

The point to note is that while other global benchmarks have been rallying since mid-February, the SGX Nifty and Shanghai Composite Index are the late entrants to the party. The movement in these two markets over the next week is therefore critical to determine the sustainability of this uptrend.