Budget rally turns volatile

M. S. Narasimhan

AFTER showing some signs of stability at the beginning, the market turned volatile towards the end of the week. Old economy stocks, which were ruling the market during the past few weeks, have finally witnessed some profit-booking. Though the attention of the market was initially diverted to some new economy stocks, there was no follow-up.

While the Budget expectation fuelled a bullish trend initially, the fear of harsh Budget pulled down the indices during the week. There is a flow of both positive and negative news about the forthcoming Budget. On the one hand, the Government is maintaining a stance that there would be hardly any major tax concession except reduction in import duties. The domestic industries, which is already finding it difficult to face the competition from imports, are expected to face further difficulties if the import duty cut effected.

On the positive side, reports indicate that the Government will either reduce the interest rates on small savings and P.F. or withdraw some of the small savings schemes. This in turn is expected to divert a part of the funds to mutual funds and stock market. The volatility of the market will continue and could increase further till the Budget.

The market opened on a firm note but failed to show any major advance. However, the Sensex closed above 4400 points after a long time interval. Profit booking at higher level pulled down the indices but there was no major threat to the trend. The market turned bullish on Thursday following HLL's better-than-expected performance for the year ended December 2000.

Though the market was stable for a substantial part of the day on Friday, it crashed by more than 100 points towards the close of the session. All sectors witnessed selling pressure. Of the 30 Sensex stocks, only four of them were able to close with a gain for the week. The gainers include Reliance, Telco, HLL and ITC. Prominent losers include ICICI, Glaxo, SBI, MTNL, BHEL and several other stocks. Compared to old-economy stocks, new-economy stocks have posted lower loss during the same period.

Macro-technical indicators fail to support any major uptrend in the near future. The advance-decline ratio has turned negative. The number of advances was just 9 against 138 declines in Group-A stocks on Friday. Even on days when the market ruled firm, the number of declines was on a par with number of advances.

Though FIIs have turned net buyers during the week, mutual funds were net sellers of equal volume. The trading volume in NSE has improved but there was no major change at the BSE. Signals from overseas market are also extremely bearish.

The technical outlook of the market witnessed a minor change towards the close of the week. Though the indices stayed above all moving averages, the 200 DEMA has turned flat. The Sensex has moved very close to the 200 DEMA for the second time in a short period. Though a support is expected at this level, the continuation of flat trend in the moving average causes some amount of uncertainty.

However, the Sensex has a strong support at 4211, followed by 4187. On the upside, there is no major resistance to the Sensex till 4800 points. The broad-based BSE-100 was able to overcome short-term resistance by crossing the previous peak. However, the sharp decline of the index on Friday has resulted in the formation of a new resistance level at 2300.

Click here for Chart

In comparison to the Sensex, BSE-100, which has more new-economy stocks, was more volatile during the last two days. The long-term indicators, in essence, suggest that the indices are at critical stage and a strong news is required to push them back to bullish trend. Interest rate and CRR cut by RBI on Friday is one such news that could attract operators to take fresh position in the market.

The intermediate trend is really under trouble unless the situation is set right immediately. The MACD indicator has moved downward and also below its trigger line. MACD penetration has taken place in both the indices. Going by the historical evidence, such reversal at this stage is a confirmation of continuation of bear market. If the intermediate trend fails to recover on Monday, it would cause a loss of 300 to 400 points in the near future.

The short-term indicators are however giving some hope for a fresh buying interest in the market. A sharp reaction of the market on Friday towards the closing hours is more of a panic selling towards the weekend. There is a scope for a sharp recovery of the market on Monday on account of RBI's action. The 5-day ROC has moved into oversold zone and is ready for a correction.

The RSI has also moved close to its support level of 30 points. RSI points to a scope for a technical correction within a few days. The Stochastic Oscillator has also confirmed the oversold position of the market. The short-term indicators unilaterally point towards a scope for wiping out the losses recorded in the previous settlement.

The market is moving on the expected lines. Initially, the funds moved from one sector to other based on Budget expectations. Panic selling was witnessed on Friday as every one wanted to exit from the market before others. This in turn indicates the lack of confidence about an investor-friendly Budget being presented by the Government.

Though there is no need to disturb present long positions, a close watch is required on Monday since indices have moved close to the moving averages. Further expansion can be considered if the market turns positive on Monday. If market fails to improve on Monday, all long positions can be closed. Fresh short positions can be initiated below 4280. Periodical profit-booking is desirable in a volatile market.

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