Institutional buying gives fresh hope

M.S. Narasimhan

THE uncertain phase of the market continued during the week while volumes dried up during the period.

There was no trading interest on either side due to lack of clear signals from major players. The depreciation of rupee, despite certain measures by the RBI, has also contributed to the uncertainty. Since a few banks have already started adjusting their PLR, there is a concern regarding the performance of the corporate sector in the second quarter.

Above all, there is no major positive news both in domestic and international markets. The high-low spread of the Sensex has come down to 150 points. Unless institutional investors initiate fresh action, the market will continue to move without any direction in the short run.

Since several stocks are selling at a price close to the 52-week low, institutional sales have come down. While selling pressure from FIIs has dropped considerably, investments from mutual funds have turned positive. However, the volume is not adequate to influence the current trend of the market and induce traders to take fresh positions. The sudden demand for pharmaceutical and a few old-economy stocks are indicative of the market's preference for defensive stocks.

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On the positive side, there is no major fresh selling in the market particularly by FIIs and mutual funds. There is no fresh threat of further increase in the interest rate. The quarterly results now give a better picture with most of the companies having published their results. The first quarter profit of 1,500 firms show an increase of around 30 per cent.

Software stocks were affected significantly despite the sharp growth in performance reported by most industry majors. Since many of them have significant export revenue, the depreciation of rupee should improve their profit margin further in the next quarter. The first quarter export data is also encouraging. On the financial side, the Government is not likely to face any major problem. All these positive news is likely to eventually get reflected in the stock market.

The macro-level indicators give a mixed picture about the future of the market. The advance-decline ratio is consistent with the general trend of the market and is placed close to the zero level. The long positions of the market have come down significantly, indicating further liquidation. The volume of trading is also low, and thus, fails to give any sort of confirmation on the current trend.

The outstanding positions and volume suggest that the market is close to its bottom and is getting ready for the next phase. The market witnessed a sign of recovery on Friday in frontline stocks such as Hindustan Lever, SmithKline Beecham Healthcare and Nestle.

There is no major change in the technical position of the market since the market was in sideways pattern during the week. The short-term indicators have also failed to support the market despite their oversold values. On the other hand, long-term and intermediate trend indicators have put pressure on the market.

While the Sensex has a strong support at the 4000-mark, there are several resistance levels between 4450 and 4700 points. Since some strong news is required for the market to break through such multiple resistance levels, long-term investments can be considered only on the outbreak of such news.

The short-run outlook available from the moving averages is encouraging since the gap between the moving averages and price line has increased significantly. The broadbased BSE-100 enjoys a strong support at the 2000-mark while it faces resistance in the 2250-2400 range.

The intermediate trend indicator, MACD, has continued its downward path. The momentum has decelerated, which gives some hope for a revival of the intermediate trend. The gap between the MACD and its indicator has also narrowed down and the current set-up is ripe for a reversal of the trend. In the MACD reverses direction and manages to move above its trigger line, the Sensex could see a rally of 800 to 900 points.

The short-term indicators have remained bullish and are currently in the oversold region. The 5-day ROC is below zero level and currently placed at -2.12 per cent for Sensex and -3.64 per cent for BSE-100.

The Relative Strength Index is below the support level of 30 points and currently around 20 points in both indices. The stochastic oscillator is close to its support level of 20 points. The short-term indicators have failed to complete the cycle during the previous week and waiting for the next round of an uptrend. The long-short position of the market also confirms a scope for short-covering and could provide fresh life to the market.

Institutional selling pressure, which pulled down the Sensex from the 5000-mark to the 4000-mark, has eased during the previous settlement. This is the major development which has arrested the downtrend. However, the future of the market depends on fresh inflow of capital, which in turn will attract speculative buying.

Thus, a close watch is required on institutional investment values. Long positions can be avoided until there is a clear evidence of a reversal in the present downtrend. Since moving averages are far away from the current level, the first sign of reversal is expected from MACD. Short positions can be maintained until there is a reversal in RSI and stochastic oscillator.

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