Spooked by negative economic cues such as the surge in food inflation, the markets have begun the New Year on a bad note. On the BSE, the Sensex ended 880 points lower at 19,692 and the Nifty on the NSE shed 230 points to close at 5,905. Markets suffered their worst single-day fall in more than seven months on the “Black Friday”. Selling was seen across the board and all the sectoral indices ended in the red. Bulk of the damage was done by metals and rate sensitive sectors.
Ahead of third quarter results, profit taking was seen in frontline IT counters. The market sentiment turned negative due to the concern over a possible interest hike by the RBI during its next policy meeting on January 25, renewed institutional selling and stubborn inflation. Fears over the stalemate between the ruling coalition UPA and the opposition NDA spilling over to the Budget session and impacting policy-making are casting a negative shadow. Weekend positives such as strong export performance, stability in the US markets and assurances over the state of economy by the Prime Minister and the finance minister may see markets recoup some of the recent losses.
Key events to watch in the week ahead are the announcement of IIP and WPI data. For the week ahead, chartists predict a trading band of 19,320 and 20,140 for the Sensex and 5,820 and 6,080 for the Nifty. Supports for the week are at 19,510 and 19,330 and 5,840 and 5,780. Expect resistance to the indices at 19,820 and 20,100 and 5,970 and 6,040.
It is pertinent to recall that the Nifty has found strong support near 5,680 and 5,750-level and similarly faced a strong resistance at 6,175 and 6,225-level in the last eight weeks.
An important key to investing is to remember that stocks are not lottery tickets. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.
FUTURES & OPTIONS
Mirroring the weak undercurrent in the cash market, a lackluster trading was seen in the derivatives segment. Volumes improv-ed as the selling during the latter part of the week accelerated unwinding of longs and build up of shorts.
Low rollovers and open interest was indicative of low confidence and caution among the market players over the near-term direction of the markets. Contrarians feel that selling action is slightly overdone and a mild recovery is on the cards ahead of the Q3 numbers.
* The finance minister’s promise to support oil companies suffering from under-recoveries may trigger some action in counters such as IOC, HPCL, BPCL and ONGC. Strong refining margins may give fillip to Reliance Industries.
* Corrections in frontline IT counters will be short lived, assert industry watchers. Results of Infosys and its guidance will provide clues over the health of the IT sector.
* Banking stocks are facing selling pressure on every corrective rally on the fears of erosion in net interest margins and high interest rate regime impacting credit off-take. Contrarian buying suggested in selective banks.
* Healthcare and power stocks are attracting buying at lower levels. Follow up buying may see counters like Ranbaxy, Divi Labs, CESC, GMDC and Tata Power post gains.
* Auto stocks may continue to skid on slippery outlook. Sell on rallies suggest punters.
* Firm dollar may put metals and other commodities on back foot. Slight caution warranted.
STOCK SCAN
* Maharashtra Seamless is the country’s largest manufacturer of seamless steel pipes used by sectors such as oil and gas, boilers and heat exchangers, bearing and general engineering industries. The company also manufactures another category of pipes called ERW pipes used in drinking water and sewage treatment; and also has a power division. A recent expansion to produce pipes of 14-inch diameter for the first time in India and a good order book spell good earnings growth in the coming quarters. Buy on declines for a target price of `550 in the medium term.
* Gujarat Flourochemicals is India’s largest and most competitive producer of refrigerant (HCFC22) and has a strong presence in international markets. The company has a healthy revenue stream by sale of carbon credits and commissioned power plants of 53 MW. The company also has a subsidiary, Inox Wind Ltd, which has manufacturing facilities for wind turbines. After the weak second quarter performance, the company is expected to post improved operational margins in next few quarters. Accumulate in the present corrective phase for a target price of `375 in the medium term.
Smallcap counters such as Carol Info, Visa Steel, Bharat Rasayan, Xpro India and REI Six Ten are witnessing ‘interested’ action.
* Carol Info is the holding company of Wockhardt Group’s hospital division. Sources indicate that an M&A action in the counter. Buy on declines for speculative gains.
C. Kutumba Rao is a Hyderabad-based stock market analyst. The views expressed and the recommendations made are those of the author. Readers are strongly recommended to consult their financial advisors before making any financial investments. This newspaper is not liable for investment decisions made on the basis of recommendations in these columns.