Rattled by Dubai's debt crisis, stock markets slumped on fears that although the major central banks have stabilised the financial system, some of the 'excesses' simply refuse to disappear and may disrupt the system again.
Erasing most gains of three-week rally, the benchmark indices fell by more than two per cent during the week ended. On the BSE, the Sensex fell by 390 points to end at 16,632 and the Nifty on the NSE shed 110 points to close at 4,942. However, the bounce back from intra-day lows on Friday reflects the bullish undertone and resilience of the markets.
Fears over tax on capital inflows and withdrawal of stimulus packages have been allayed by the finance minister, but the impact of rising food inflation is a cause of concern. Dubai's effort to reschedule its debt is a sign that government spending alone won't be enough to protect markets.
Differentiation between riskier and less risky asset classes in which correlatio-ns have risen, making it difficult to make money simply by riding the liquidity wave from central banks. Stock volatility will jump sharply as countries and companies default on loans.
Markets still look bullish with the government giving big push to the reform agenda but the rise in risk aversion is likely and investors have to start focusing even more on the fundamentals.
For the week ahead, chartists predict a trading range of 16,250 and 17,100 for the Sensex and 4,800 and 5,120 for the Nifty. Crucial supports for the indices are last week lows at 16,210 and 4,806. Traders fear that below the-se levels, indices might test lows of November series.
Immediate resistances for the indices are at 16,880 and 17,100 and 4,980 and 5,060. Be bearish only below 4,850-level on closing basis. Whatever is hard to do in the market is generally the right thing; and whatever is easy is usually the wrong thing to do.
Futures & Options
Despite hyper volatility and wild swings of November series, the rollover of positions to the December series was in line with last three months average at 84 per cent. However, stock futures witnessed a lower rollover reflecting the lack of confidence among the market players over the near term direction of many individual stocks. Option activity indicates a strong support for Nifty at 4,800-4,850 level and strong resistance at 5,050-5,100 level.
Adopt strangle strategy in index options by buying Nifty4,900 strike put and Nifty5,000 strike call options, to take advantage of directional change in the markets. Sectors that witnessed higher rollover are metal, banking, telecom, engineering, sugar and power.
Stock futures looking good for further gains are Ranbaxy, BEL, Lupin, PFC, India Cement, BPCL, JP Hydro, Neyveli and GAIL. Among the momentum pack, Educomp, IFCI, Suzlon, Unitech and Hotel Leela may rally further from the current levels.
Punters predict some speculative activity in the ADAG group. Buy Reliance Infra and Reliance Capital keeping last week lows as stop loss for sharp returns. Lower crude prices may trigger further buying in PSU refiners. Pharma stocks are attracting buying on every dip. Buy on declines Dr Reddy, Ranbaxy, Cipla, Aurobindo, Biocon and Lupin.
Corrections in banking and auto stocks are likely to be short lived ones. Buy state owned banks as rise in interest rates to curb inflation is expected in next couple of quarters. Use sharp declines to accumulate stocks in auto and auto ancillary sectors.
Jain Irrigation Systems, a company synonymous for drip irrigation equipment, has over the years emerged as a diversified multi-product agri company. It is the largest manufacturer of polyethylene pipes and also the largest manufacturer of Tissue Culture Banana Plants in India. It has world class food processing facilities for dehydration of onions, vegetables and production of fruit purees, concentrates and pulp. IFC, a affiliate of World Bank has picked up stake in the company. Buy at current levels for a target price of Rs 1200 in the next few months.
Volumes have improved remarkably in HBL Power after the stock has gone ex-split. The company is a pioneer in the design, development and manufacture of specialised batteries, DC systems and associated electronics. It supplies to aviation, defence, railways, telecom and other engineering industries. Buy HBL Power at current levels for price target of Rs 100 in medium term.
Cravatex is one of the largest manufacturers of sports and casual wear for leading companies like FILA and Slazenger.
The company represents several reputed international brands of fitness equipment in India and offers a range of advanced international beauty therapies catering the new quest for fitness, exercise, health and beauty. Buy this only ISO-certified and listed company in the sector for unexpected a price target of Rs 275 in the medium term.