From THE HINDU group of publications
Sunday, July 22, 2001


Markets | Next

Bright long-term outlook

M. S. Narasimhan

THE sentiment of the market suddenly turned weak and the fear of an uncertain future prevented many to take long positions.

The problems relating to Unit-64 has surfaced again during the course of the week. There is a general expectation that UTI has no other alternative but to liquidate substantial amounts of its holdings despite heavy borrowing.

Since the issue is taking the shape of scam with a few CBI raids, it may influence the market sentiment further as and when market gets additional details. The US market also witnessed high level of volatility during the week.

On Monday, the Nasdaq witnessed a bearish trend but it bounced back on Tuesday. It moved up and down during the rest of the week. Again conflicting reports on the recovery of the market and profit warning affected the sentiment of the market. On the positive side, reports suggest that only twelve per cent of results so far announced in the US market were below the analysts' expectation and in 61 per cent cases, the results have bettered analysts' expectations.

Though there is some uncertainty on the exact period by which the economy will recover, there is a general consensus that the worst is over. On the domestic side, the results of companies have started flowing in. Except companies belonging to software education sector, others were able to show a positive growth even in a worst period. The medium to long-term outlook of the market looks bright and there is a fair chance for the market to bounce back.

The market opened on steady note on Monday and was able to sustain the level during the day. Despite a massive sell off in the Nasdaq market on Monday, the domestic market was able to sustain the level on Tuesday. During the next three days, the indices have lost almost the entire gain of the previous week.

All major stocks have suffered during the week particularly stocks, which recorded gain during the previous week. The activity of the market is also shifting from companies, which have declared results to the ones that are expected to declare the results. Profit booking also takes place frequently in the absence of carry over facility.

Macro technical indicators fail to show any major recovery of the market. The advance-decline ratio has turned bearish with declines outnumbering advances in all groups throughout the week. The trading volume has also seen a decline in both exchanges.

FII buying has also declined suddenly except on Tuesday, when there were a few major off-the-market deals between funds. Domestic institutional investors have turned net buyers for the first time but the volume is low and hence fails to cause any direct impact in the market.

The technical outlook of the market has turned bearish within a short period. All indicators, which reported a sign of recovery, have turned negative during the week. The indices have moved below the 50-day moving averages and thus give a sell signal of whatever positions that have been created.

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The market has also moved downward at the same speed at which it moved upward. The indices have even moved below the short-term 25 day moving average. With this change of set up, the Sensex will see a fresh resistance at 3400, 3458 and 3588 in the event of any technical corrections on the upside.

On the positive side the Sensex has the support at 3250 and below this level at 3080. The outlook of broad-based BSE-100 index is relatively much weaker than BSE Sensex. The index failed to cross even 25-day moving average during this period and now moved much below to this level. Unless a major shake out takes place across the countries, the market will move into sideways.

The intermediate indicator, MACD, fails to give a clear picture when the market started moving sideways with higher range. In a normal sideways market with a narrow range, MACD will tend to give a bearish view. Since the indices are showing a upward movement of more than 5% in one week and an equal magnitude of in another week, MACD is also reflecting this trend.

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MACD indicator for Sensex has moved downward and placed below its trigger value. With this change in the set up of MACD, there is little scope for the market to show any significant gain. MACD of BSE-100 index has moved below its trigger and thus rules out any positive intermediate outlook.

The short-term outlook has however turned better after sustaining a loss of more than 100 points during the week. The market has partially reacted during this week since many of the short-term indicators were above the resistance level last week. At the end of Friday, many of the indicators are either close to or below the support level.

The 5-day ROC has declined and placed at -3.28 per cent. It will hit the support level within another 50 points loss. The RSI indicator has already hit the support level of 30 points and pointing out a short-term recovery of the market anytime during the week. The Stochastic Oscillator of both indices crossed the support level of 20 points and pointing out an immediate short-term reversal of the market. In view of encouraging short-term outlooks, current holding can be liquidated over the next two or three days.

Since the indices failed to sustain the uptrend and cross 3474 level prescribed during the previous week, there is no scope for further expansion of long positions. Similarly, the indices crossed the stop loss level on Wednesday requiring an immediate sale.

Since the outlook has turned bearish, it is better to maintain short positions through index futures. Long positions can be considered if the Sensex is in a position to clear 3458 with good volume and force. Small investors need to slow down the buying but there is no need to sell in panic in view of limited scope for any major bearish trend.

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

Section  : Markets
Next     : Exit from L&T, Grasim Industries

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