Uptrend restricted to select stocks

M. S. Narasimhan

THE market was confined to a narrow range and closed the week with a marginal gain. After a major downtrend, it is now consolidating for the next move.

While buying from FIIs and local mutual funds has arrested the bearish trend, there is no major follow-up speculative buying in the market. Institutional buying is also restricted to select technology stocks and it looks more in the nature of deploying the cash realised from their earlier sale.

In the absence of any major positive development, the level of fresh investments may come down. There is also a concern about a possible hike in petro products since the international price of crude has soared. Increase in interest rates, the depreciation of rupee and increase in petrol price are the three important issues which would affect the profitability of many old-economy stocks.

Further, all the above three macro economic factors will affect the performance of the overall economy as well. The inflation rate is already moving up, which may trigger further increase in interest rates. Thus, the threat for the corporate sector from the long-term perspective appears to be inhibiting operators from taking any major position in the market. The market will move in a sideways pattern unless there is some sustained FII buying. Moreover, a minor bearish trend will set in immediately once institutional investment declines.

On the positive side, many of the negative factors listed above would not have a significant impact on the software stocks, which command high weightage in all major market indices. The interest rate hike would affect only a few software companies since many leading players have negligible debt. While the rise in prices of petro products has no relevance, the depreciation of rupee would have a positive impact by way of significant export earnings.

Since the US and other economies are displaying strength, the growth rate of the software industry is protected. Thus, stocks from the software sector will be viewed as defensive and investment interest will continue in the sector. If a large part of funds shift to this sector, software stocks will witness a major uptrend in the near future.

The market opened on a steady note on Monday and recovered all the intra-day losses towards the closing. The uptrend continued on Wednesday and it recorded a net gain of 95 points. On the remaining two days, the market movements were narrow and the Sensex closed with a net gain of 115 points for the week. The Sensex moved within a range of 200 points during the week, but the volume was reasonable.

The advance-decline (A-D) ratio has shown marginal improvement and there is no divergence between A-D and price movements. The short and long positions in the BSE were also stable and showed a marginal change during the week. Investments by FIIs exceeded Rs. 550 crores during the week. This is a pointer that the market is going through a process of consolidation and a new trend will emerge shortly.

The technical set-up of the market portrays a mixed picture. While the intermediate indicator has turned extremely bullish, the short-term indicators are moving towards the over-bought level. The rally in the previous week has pushed the indices closer to their moving average.

The recent sideways pattern is partly on account of the lack of strong news that is required when the prices move closer to moving averages. Moving averages act as strong resistance during the bearish trend and unless there is strong momentum, it would be difficult to break above the moving averages.

The Sensex will face strong resistance at 4367 and after that there is a scope for another 100 points uptrend. The second strong resistance is expected at 4471 and subsequently between 4600 and 4650. The long-term trend reversal would be confirmed only when the Sensex adds another 300 points.

The intermediate trend indicator has, however, turned bullish and confirms an uptrend. The MACD has moved above its 9-day EMA and shows a healthy difference of 20 points. Even for the BSE-100 index, the indicator has moved above its trigger, confirming the onset of an intermediate uptrend in software sector.

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Many individual stocks from the software sector have turned bullish whereas such a signal is absent in other old-economy stocks. If the intermediate uptrend gets stronger and supported by a crossover of any one of the moving averages, the Sensex has the potential to add another 300 to 400 points within two to three weeks.

The short-term indicators provide a mixed picture. While the indicators have moved into the overbought zone, they have not reached the resistance level. The 5-day ROC has crossed the zero level and is currently positioned at 2.21 per cent for the Sensex and 3.55 per cent for the BSE-100. There is a scope for a rally of about 100 points in the Sensex the before 5-day ROC reaches the technical correction point.

The Relative Strength Index has also moved above 30 points but is yet to cross its resistance level of 70 points. It is close to the resistance level in both indices and will support a rally of another 100 points in the next two days before reaching the resistance level. The stochastic oscillator is very close to its resistance level and could trigger a reversal at any moment.

The major strength of the market is continuation of FIIs' investments, which will prevent any major downside impact as long as they are present in the market. A host of negative factors may affect select stocks in the market, and thus, investments in old-economy stocks are to be avoided at the current level. Exposure in software stocks can be continued until the MACD turns downwards or the price line fails to cross moving averages. Short positions can be avoided at the current level but can be considered once the uptrend is restricted by the moving averages.

(The author is Associate Professor at the Indian Institute of Management, Bangalore.)