From THE HINDU group of publications
Sunday, February 25, 2001


Markets | Next

Post-Budget outlook improved

M.S. Narasimhan

THE market turned into bearish mood on Friday after the presentation of Economic Survey.

Though there was nothing new and unexpected findings in the survey, the market reacted negatively more on account of nervousness. If the Government is able to implement some of the measures outlined in the survey to boost the economy during the current Budget, the market will react positively in the post-Budget period.

While the measures such as opening up the economy in more sectors and speeding up the disinvestment process will attract more FII funds. Reduction of interest on small savings will bring down the interest cost and also divert funds to stock market. Another positive news expected by the market is reduction of dividend tax and if the Government meets this demand, the sentiment will improve considerably . The post-Budget period looks favourable to investors in the market.

The market opened on a steady note on Monday on the strength of interest rate cut by the RBI and moved forward with a marginal gain for the next two days. While there were no major movements in the market for the first four days, the market crashed immediately after the presentation of Economic Survey on Friday. While Sensex suffered a loss of more than 200 points ( 4.80% ), the broad-based BSE -100 suffered a loss of 136 points ( 6.11% ) during the week because of major losses in the new-economy stocks.

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Excessive speculation with bank borrowings in new-economy stocks triggered fresh round of selling on account of failure of investors to meet the margin requirements in the falling market. Though many of the software stocks have reported good workings for the quarter, the sharp decline in the tech-laced Nasdaq Composite Index influenced the prices of local software stocks. Nasdaq suffered major loss during the week but recovered marginally on Friday.

Macro indicators fail to boost the market sentiment. The advance-decline ratio turned very poor and close to zero towards the end of the week. Among the Sensex stock, HLL was the lone gainer for the week. The remaining 29 stocks suffered a loss ranging from 1 to 16 per cent during the week. All leading stocks, except Reliance, have suffered a decline in excess of 10 per cent during the week.

There is no major improvement in the trading volume. On the positive side, FIIs are still net buyers but domestic funds have pressed sales to an equal extent. The reaction of FIIs towards the Economic Survey is critical in determining the long term prospects of the market. With the FIIs continued presence, there is a scope for revival of the market. In the event of any change in their investment pattern, the market will face another major crash.

The technical outlook of the market has considerably weakened during the week with the crash on Friday. Indices have moved below all moving averages and the moving averages are also about to turn down. It will seriously affect the recovery of the market and all moving averages will act as an resistance to the market. The resistance levels facing the Sensex are 4195, 4225 and 4285.

The technical set up was spoiled more in the case of BSE-100 and new-economy stocks suffer from the pressures of both domestic and international markets. The indices are just above an upward trendline drawn from the last two bottoms. If this support level is breached, there is a danger of Sensex moving below the 3800 level in a very short period.

The intermediate trend has seen further deterioration and the MACD suffered considerable loss during the week. The MACD of Sensex declined from 62.58 to 17.69 and also moved far below its trigger line. For BSE-100, the indicator has moved close to zero level and positioned below its trigger value.

With this intermediate bearish trend, the market is yet to see any reversal of long-term bearish trend that commenced in April 2000. The intermediate bearish trend during the next few weeks has the potential to cause a loss of another 400 to 500 points to complete the intermediate downtrend.

The short-term outlook of the market is extremely bullish in view of major loss suffered during the week. All the short-term indicators have moved below their respective support levels. The 5-day ROC of the Sensex and BSE-100 are at -4.80% and -6.11% against the support level of -5%. The technical correction is expected at any moment and in the event of short-term reversal, the Sensex has the potential of wiping out the loss of the week.

The RSI has moved below its support level of 30 points and currently positioned around 15 points for both indices. The indicator gives a strong reversal of the market in a day or two. The Stochastic Oscillator is also placed at the reversal point.

With the indices falling below moving averages, there is no merit in holding any long position at the current level. Short-position can be considered at the current level particularly if the indices decline below the trendline support on Monday. Long positions can be maintained only in the event of a major reversal in the indices on Monday and Sensex moving above 4225.

Since Budget expectations will drive the market for the next two days as the prices have come down sharply on Friday, there may not be any general pattern in the market. It is better to hold cash in such a market and wait for a clear trend to emerge during the post-Budget period.

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

Section  : Markets
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