Bearish days ahead

THE market closed for the year with a net loss of more than 20% after recording a 60% gain during the previous year. This year is also one of the most volatile years after 1992.

The BSE Sensex recorded a quick gain of more than 1000 points at the beginning of the year on the support of new economy stocks, which attracted larger buyers all over the world.

While the bullish trend prevailed during the first quarter of the year, the market turned bearish for the rest of the year. From the peak level of 6150, the BSE Sensex moved below 3500 before recovering to 4000 level. The market witnessed three intermediate trend cycles with continuous descending tops.

Though the indices have closed with a net gain on the last day of the trading, there is no clear picture on the future direction of the market. The new economy stocks have lost ground in a short period after several companies started giving profit warning for the current quarter. After Europe, the US and Japan are also showing sign of recession.

Oil price increase in the international market has affected the performance of domestic economy. As the market is opening with a bearish outlook, there is limited scope for any major gain during the next few weeks.

The market opened on a steady note after Christmas holidays but lost immediately 100 points. Institutional selling of the previous week and the rumour that a few FIIs are winding up Indian operations have triggered selling pressure in major counters. Software, FMCG and pharmaceutical stocks, which were in limelight till recently, have been hammered down and many of them are close to 52-week low.

On many counters, a panic selling is observed. The banking sector stocks, which witnessed some interest during the previous week, have witnessed selling pressure. Cement and a few other old-economy stocks have witnessed some interest during the week. PSU stocks have shown mixed trend depending the on sentiment and news on Cabinet meeting on disinvestment.

Macro indicators of the market fail to support any strong recovery of the market. Advance-decline ratio is in line with the market trend. Though the number of advances has shown considerable improvement in A-group stocks, it has not spread over to other groups. The volume of trading was also on the lower side. The institutional investors have turned massive sellers during the last few days. FIIs have sold more than Rs 700 crore during the last six days. Domestic funds have also joined with FIIs and moved into cash to protect their NAV.

The bearish sentiment is also supported by an increase in net short position of the market. The delivery based institutional selling will create a strong bearish impact for the long-term trend of the market. It will also create a fear of defaulters in the market.

The technical outlook of the market remains bearish despite a marginal recovery of the market during the week. All moving averages are in downward and effectively put a cap for any long-term uptrend of the market. With low volume and absence of any strong news in the market, it would be difficult to break any of the moving averages to set a long-term uptrend. It will take some more time for the market to get such strength. Between 4000 and 4300, there are four resistance levels for the current trend. The Sensex will also have to meet a strong resistance line immediately after crossing the 4000 mark.

The current recovery of the market during the last three days is also more of short-term technical correction after a major downtrend. Increased gap between the moving averages and the price line has also triggered short-term recovery of the market. While short positions can be continued till the Sensex stays below 4000 mark, it is not desirable to hold the short position beyond 4028 level. While scope for long position is limited in the short-run, the same may be considered beyond 4124 level of the Sensex.

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The intermediate trend indicator has turned further bearish for the week. It has slipped into negative zone for both indices. Though its trigger is still on the positive zone, it is above MACD and hence creates a bearish outlook. The momentum of bearish trend will pick up soon before the MACD moving into extreme level of over-sold position. During this period, the Sensex can witness a net decline of 300 to 500 points. The MACD indicator supports a minor gain of less than 100 points due to wide gap between the MACD and trigger line.

The short-term indictors are bullish as the market witnessed major selling during the previous week. The 5-day ROC has started showing a recovery and expects the market to sustain the recovery for few more days. ROC gives a hope of further recovery of 100 to 150 points during the next few days before hitting the resistance level.

The growth potential is not very high as per other two short-term indicators. The RSI and Stochastic Oscillators are around 45 against the resistance level of 70 and 80 points. These two indicators point out limited scope for the continuation of the uptrend and expect the market to return to bearish trend within another 100 points.

In view of prevailing bearish outlook, there is no need to disturb the short positions in the market. Further expansion of short positions can be avoided as the market is under short-term correction. Fresh short positions can be initiated once the indices started moving downward after the corrective phase. While scope for long position is limited, the same may be considered in the event of Sensex crossing 4124 points.

Investment by FIIs and domestic mutual funds is critical to reverse the current downtrend and hence they need to be watched before initiating long positions. Small investors can avoid direct exposure in the market. For the next few months, it is desirable to concentrate on debt funds of mutual funds.

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