Index Outlook. Indices shatter long-term barriers

As the first six months of 2017 draw to a close, investors have much to be thankful about. There was broad-based celebration in the stock market with optimism triumphing over scepticism. While the Sensex and the Nifty are up 17 per cent so far this year, the gains in BSE mid and small cap indices are much higher at 22 and 27 per cent respectively.

The strong break above 30,000 in the Sensex and 9,100 in the Nifty has made the medium-term outlook quite favourable. While short-term turbulences are on par for the course, indices are likely to march higher in the coming months.

The positive outlook will stay in place as long as the Sensex and the Nifty hold above 30,000 and 9,100 respectively.

The week and the month ahead promise to be quite exciting too as the Goods and Services Tax, that is set to change the way Indian businesses operate, rolls out on July 1. Everyone agrees that it will increase transparency, the self-policing mechanism will expand tax base, lead to greater tax compliance and eventually higher tax revenue.

There are likely to be hiccups in the coming months as smaller businesses adopt to the change. But if the country faces this transition period with the same stoicism that was demonstrated during demonetisation, we can look ahead at the long-term benefits that are definite to come out of this changeover. The stock market has so far approached the new tax regime in the right spirit.

The tide in stock market has turned definitively in favour of the bulls since the thumping victory of the ruling party in the March assembly elections. Both domestic and foreign investors have been pouring money into the markets since then.

Foreign portfolio investors have net purchased stocks worth $8.6 billion so far this calendar, far higher than the $2.9 billion inflows in the first half of 2016. There was a steep surge in March, immediately after the election, with the tally for the month at $4.7 billion The weakness in the dollar, with the dollar index down 5 per cent since the beginning of this year, has been favourable for all emerging markets, including India. The decline in crude oil prices is another positive for the Indian market at this juncture as our stock market typically fares better in times when crude prices decline.

The Federal Reserve’s rate hike did not have any impact on the market in India or elsewhere as the near-zero interest rates in euro zone; Japan and other countries continue to support liquidity in markets. Hopes of a rate cut by the RBI due to the fall in inflation appears to be boosting sentiments further. The risk to our market, at this point, stems from the overheated US market. If profit booking kicks-in globally, our market can also follow suit.

Investors will track the progress of the monsoon, foreign investors’ actions and the derivative expiry in the coming week. Volatility is likely as the June contracts are rolled over.

The Nifty closed on a weak note on Friday to end the week on a flat note.

Short-term trend: The Nifty has been moving sideways with a positive bias over the past week. Since this comes after a sharp upward surge, short-term outlook stays positive.

The extremely shallow corrections being witnessed over the last couple of months indicate that it would be best to play long, by buying in the dips. Short-term traders can adopt this strategy as long as the index trades above 9,500. Next short-term support is at 9,328. Short-term outlook will turn negative only on a close below 9,328.

On the other hand, upward break-out next week, if short-covering pushes up prices, can take the index higher to 9,844; 9,939 or 10,000.

Medium-term trend: If the current up-move is the continuation of the move that began at 5,318, next targets are 10,626 and 12,077. If we look at the minor break-up of the waves, we get targets at 10,155 and 10,927.

In short, the Nifty seems all set to move towards the 10,000 level. This view will need to be revised only if there is a close below 9,100. Key medium-term support is at 8,600.

The short-term trend in the Sensex is currently up and the outlook needs to be revised only if the index goes on to close below 30,600. Short-term targets for the index are 31,934 and 32,271.

Medium-term targets are 32,335 and 35,070. Medium term trend will be under threat only if the index records a firm close below 30,000.

Next medium-term support is at 29,250. The strong surge in the Sensex past the 30,000 peak implies that the index has its sight set on the next milestone at 35,000.

Global benchmark indices eased somewhat over the past few weeks but some European markets and US markets continue to soar higher.

The DAX hit record highs last week and despite the problems over BREXIT, FTSE is also close to its life-time high at 7,524.

The correction in the Dow Jones Industrial Average in April turned out to be quite shallow and the index is once again close to its life-time highs at 21,200. The index is currently facing resistance at this level.

But breach of this level can take the Dow to 22,500. The CBOE VIX moving close to 10 implies that the mood in the US market continues to be quite upbeat.

Many of the other Asian emerging markets such as Malaysia, Taiwan, the Philippines and South Korea are also on a roll this year.

But emerging markets dependent on commodities such as Russia and Brazil have fared rather poorly.