Market returns to bearish mood

M.S. Narasimhan

DESPITE the improved financial performance posted by software companies, the gain recorded in the earlier weeks was almost wiped off in the previous week.

This development is in contrast to the movement of the Nasdaq market, which recovered all its losses of the earlier week. Stocks across all sectors have been affected though there is no major change in the fundamentals of the economy or the stock concerned.

Some amount of uncertainty is prevailing in the market on account of various reasons. Despite recording an average daily volume of around Rs 10,000 crore, the stock market is still not free from the influence of individuals. The arrest of a film financier created panic in the market during the week. The fear of large scale selling on account of this development was effectively used by the bears to press more selling and sealed further growth potential of the market.

Another reason of uncertainty is forthcoming Budget. Though corporate sector made representations towards abolition of tax surcharge and dividend-tax there is no clear signal that the Government will go for a liberal tax regime. Since the Government has failed to achieve the disinvestment target and with the tax revenues not growing as expected, the Government would not be in a position to reduce tax rates or undertake any measures that would hamper revenue flow. Investors of all types have now turned cautious as the Union Budget has a major impact on the future direction of the market.

On the positive side, the Sensex was able to remain afloat above the 4000 level and recovered some ground towards the end of the week.

The market opened on a steady note on Monday despite the overnight 6 per cent crash at the Nasdaq market. But, the Sensex quickly lost about 60 points and ended the day on a weak note. After some stability on Tuesday, the sentiment turned bearish again on Wednesday and Sensex witnessed a loss another 75 points. It recovered the following day after hitting a low of 4006 points and gained 30 points from the low. Media and software and all new-economy stocks were been affected during this week. Infosys and Zee Tele have sustained a loss of more than 10 per cent during the week.

On the other hand, some of the old economy stocks and PSU firms in the oil sector have recovered on the strength of specific news development.

The macro-technical indicators fail to give any major hope for the revival of the market. It projects a bearish view for the short-term but the inflow from the FIIs is expected to stem any major donwslide in the market. The advance-decline ratio was below one on all days, including on days when the market witnessed marginal gain. The divergence in the A-D ratio on the negative side is a strong indicator of the weakness of the current trend. Though FIIs volumes remained positive, it was very negligible value on Friday. Further, domestic mutual funds have turned heavy sellers in the market.

The technical outlook of the market has deteriorated further during the week. As expected, the indices witnessed strong resistance from 200 DEMA and also the strong downward trend line. The indices have moved below all its moving averages. The downtrend in moving averages will also effectively resist any uptrend. Sensex will face a challenge at 4040 and 4050 in the short-run and after that at 4114 and 4274.

The market requires a major force to clear these multiple resistance leveles. Though the Sensex is trying to reverse the prolonged bearish trend on account of the crash in new economy stocks, there has been no major momentum behind the recovery process. Since the third quarter results has also failed to provide the required thrust, the next hope is the Union Budget. On the downside, there is no specific support level except the psychological base of 4000-point mark. If the Sensex fails to get support at this level, the next support level is at 3800.

The intermediate trend was also affected during the week. The MACD indicator reversed direction immediately after crossing the zero level and has now moved below its trigger level. For BSE-100, the MACD has moved downward but was able to stay above the trigger level. Since the MACD did not complete the cycle earlier, it was pointed out that the uptrend will be shaky and may not add much value during the upward move. If the intermediate downtrend picks up, the Sensex will loose around 300 points in the next three for five weeks.

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The short-term trends are giving some hope for the market for the current week as the market has lost nearly 4 per cent during the week. The 5-day ROC of Sensex and BSE-100 are positioned at -3.51% and -4.26% in the negative zone. The short-term support is normally witnessed at -5% and the Sensex will add another 100 to 150 points in the event of a reversal. The RSI is in the middle of support and resistance level. This indicator points out the continuation of bearish trend for couple of more days before getting a support.

The stochastic oscillator on the other hand is indicative of a short-term uptrend in the market. It has already moved below the support level of 20 points and placed around 10 points for both indices. There is a scope for a quick addition of 200 to 300 points.

The market ignored all positive news and short-term forces played critical role in arresting the uptrend. Since major technical indicators are also showing a bearish trend, long positions has to be avoided until the Sensex crosses 4115. Similarly, short positions can be considered once the Sensex declines below the psychological level of 4000 mark. If the Sensex moves in between these two levels, it is better to hold cash and wait for right time to enter into the market. A close watch on FIIs investments would be useful before initiating long positions. Small investors can initiate buying below 4000 level in small quantities.

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