Market Trends & Tech

Indices hit historic highs
Q1 results to drive direction It was a historical fortnight for the markets, with the barometer index BSE Sensex crossing the 15,000 level and the S&P CNX Nifty also crossing the 4,400 mark. The indices also managed to settle at all time high levels. Markets moved up crossing the 14584 level in the trend channel that had trapped the Sensex for the last 2 months.
What triggered the breakout was the continuous inflow of funds, the fall in inflation, easing fears of interest rate hike, steady progress of monsoon and fresh build-up of positions in derivatives markets.
The BSE Sensex gained 477 points or 3.29% during the fortnight to close at 14,964.12 on 6 July 2007 while the S&P CNX Nifty rose 126 points or 2.95% to 4,384.85.
Both domestic mutual funds and FII were heavy buyers and bought into equities worth Rs 33 bn and Rs 85 bn respectively, aggregating Rs. 118 billion.
Triggering markets
India’s rate of inflation has been steadily coming down in each of the last five weeks, and fell more than expected to a 14-month low of 4.03 per cent in mid-June, well below a two-year high of 6.69 per cent in late January.
With the steady decline in inflation, investors have started feeling that India’s inflation rate has entered a “comfort zone” and fear of overheating in the economy is now behind us. And the country is looking for a growth of at least 8.5 per cent after the last fiscal. Also government circles believe that an average 9.0 per cent growth over the next five years is achievable.
It seems that the monetary tightening measures adopted by the central bank has achieved the expected objective without hurting growth. The central bank has raised interest rates five times in the past year, the last time at the end of March, 2007 but now with the inflation level coming down, investors feel that the RBI would not go for another hike in CRR or raise interest rates. Banks have actually dropped deposit rates for bulk deposits by 2% from 11.5%. All these have led investors to believe that the interest costs for corporate cannot move up further, but possibly would come down in the future as the rates get lowered in months ahead.
A senior government economist has gone on record saying confidently that inflation would not be a problem in the next 5 to 6 months, assuming monsoon rains are normal. And Agriculture Ministry reports show that monsoon has been normal throughout the country.
Analysts feel, good monsoon rains will increase farm harvests, which in turn could help cease supply pressures and inflation. The government too is taking steps to improve supply of food grains and was aiming to produce an additional 20 million tonnes of wheat and pulses in the next three to four years.
Segment-wise Performance
The BSE Bankex gained 3.74%. Bank stocks are actively sought as bank credit is expected to be in demand once the interest rate starts moving down. State Bank of India (SBI), the country’s largest commercial bank, rose on reports that it would soon enter new business streams including pension funds to tap emerging opportunities.
The Capita Good index is a big gainer posting 8% gain. With rupee being weak, imports especially of capital goods have surged and even in terms of the Index of industrial production, the capital goods growth is seen very robust. Larsen & Toubro posted over 9% gain during the fortnight. The company is planning to set up separate entities to pursue its shipbuilding and power equipment manufacturing businesses. It aims at generating Rs 80 bn in five years from these businesses and will also contemplate of unlocking value for shareholders from these ventures by listing them. It has short-listed sites for the project, which is expected to go on stream by March 2010 with a capital investment of Rs 20 bn. The company has targeted to generate Rs 40 bn from the shipbuilding business in five years and another Rs 40 bn is to be generated from the power equipment manufacturing business in the same period. Meanwhile, the company management expects Rs 1,000-crore revenue per annum from railway modernisation in three years.
Auto segment got triggered when Maruti Udyog sold 59,917 vehicles in June 2007, up 24% from 48,425 vehicles sold in June 2006, its sales of 56,000 units in the domestic market, showing an uptrend of 25.5% from 44,626 units in June 2006. The scrip posted a gain of 5.66% during the fortnight. Tata Motors (4.49%), Mahindra & Mahindra (6.73%) are gainers in the 4-wheeler segment.
Cement stocks surged up after the Finance Minister P.Chidambaram said the government would not control cement or steel prices. Stocks moved up further on reports that cement firms have hiked prices by Rs 3 – 5 per 50-kilogram bag across India. The stocks such as ACC (up 21.5%), Ambuja Cements (up 11.94%) and Grasim (up 12.70%) closed strongly for the fortnight. Cement carries 1.73% weight in the wholesale price index (WPI). To keep its prices under check the government, in January abolished the 12.5% customs duty on cement and in May rolled back the dual excise duty and introduced an ad-valorem duty, which induced a price cut of Rs 3 to Rs 7 per bag. In April, it withdrew the countervailing duty (CVD) on the product. However, the sustained demand even during monsoon season and steep decline in inflation from 6.7% to just above 4% have encouraged the current move.
Gas pricing
There was significant news on the Reliance Industries counter. On the one side there is hearing going on from the power and fertilizer ministries on the pricing of gas from RIL’s D6 fields in the Krishna-Godavari (K-G) basin. On the other hand there is a feeling that the government will move in the next few months towards market to determine prices for gas. Both ONGC and Reliance Industries Ltd are likely to be called next week to make separate presentations before the Committee of Secretaries (CoS) examining the pricing issue of gas produced from the Krishna-Godavari Basin.
While the fertiliser industry maintained that the delivered price of gas from RIL’s prolific KG-D6 block should not exceed $5 per million British thermal unit (mBtu), the power sector is understood to have proposed the Government should take its share of gas in kind. As per the proposed pricing formula of RIL, the gas would be delivered in Andhra Pradesh, Maharashtra and Gujarat at a price between $5.2 and $6.2 per mBtu (including marketing margins, transportation and taxes) depending on distance from the gas field.
The price sought by RIL was $4.33 per mBtu. To this, the Fertiliser Ministry is understood to have said that the incremental fertiliser subsidy would be $7.4 billion.
The ONGC stock lost 4% after it sharply cut gas reserve estimates at one of its blocks in the Krishna Godavari Basin. The block is estimated to have 2.38 trillion cubic feet (TCF) of in-place gas reserves.
Market outlook
Markets have moved up on the back of good fundamental economic factors. The first quarter results will start streaming in from the next week onwards, and the trend in results will decide which way the market will move. If advance tax is any indication, results can be good. But investors have to be cautious. As markets move up the risks also increase proportionately.
While smart money chases stock, these operators are also smart in leveraging between futures and cash to hedge the risk. If you are not hedging then you need to be doubly cautious. But as the overall trend is positive, you will have to go stockwise.
Technical analysis
Sensex has support at 14,714 the upper side of the trend line from which it broke away. On the upper side there is virgin territory never traversed before. The stochastic indicator is in the overbought region, showing the potential to react. On the other hand the KST long term buy indicator is green. So market is likely to advance further.
Bharti Airtel: It has support at 833. One could buy on opportunities with stop loss at 830.
The KST and Stochastic indicator have signaled buy.
NTPC: Buy NTPC with stop loss at 151.70. Both KST and daily stochastic have signaled a buy