Markets to make long-term gains

Last Updated: Mon, Nov 19, 2012 04:28 hrs

In my previous article in Business Standard, dated August 13, I had mentioned August and September would be action-packed for Indian equity markets. Markets have rallied phenomenally since then, touching highs of 5,855 (Nifty Futures) in early October. Barring Reliance Industries, this rally was led by heavyweights such as Larsen and Toubro, State Bank of India, ICICI Bank, Housing Development Finance Corp, Maruti Suzuki India and Bharti Airtel. Since the October series, the Nifty has shed close to 33 per cent in open interest, suggesting a good amount of short covering in sectors such as telecom, financials and autos. This is an interesting fact, since these sectors were under a great deal of stress and were not favoured by institutional investors.

After making 52-week highs in October, our markets seem to be running into a bit of resistance and have broken below the crucial levels of 5,600 (on the Nifty). This was expected due to profit-booking but also since investors were a bit disappointed with recent Reserve Bank of India policy and weak industrial production numbers.

The question now is if the rally is here to stay? I am confident our markets are now poised for an upmove and I expect the index to be 10-12 per cent higher in six months. However, in the intermediate term, I do expect the markets to correct to 5,430/28 levels. The 5,430 level marks an important support for the market. It is from these levels that the market broke out in September. The breakout was accompanied with an expansion of volumes, which was not seen in the preceding rallies. Also, if one considers the rally from 5,237 in early September to the high of 5,855 in early October, then 5,440/30 would act as a good support, as it represents 61.8 per cent retracement of the entire rally. Options data also suggest 5,400/5,500 to be key support.

The Nifty had been consolidating in the range of 5,610 -5,750 for many weeks now and has recently closed below the 5,600 mark. It is fair to assume further profit-booking will take the Index lower to 5,530 (first support) and then towards 5,430/28 (second support). In the event the market fails to correct to 5,500/5,400, a cross above recent highs of 5,855 will signal a resumption of the rally. The rally would be comprehensive if heavyweights such as Reliance Industries and Oil and Natural Gas Corp participate, which they have not in this on-going move.

The year 2013 is going to be a very interesting one for Indian equities. I expect the Index to be 15-18 per cent higher from current levels. My favourite stocks include L&T Finance, Maruti, State Bank and Idea Cellular.

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