Is the market breaking out? - Straight from the Hip by J Mulraj
Investing in India - Straight from the Hip by J Mulraj
Is the market breaking out? A  A  A

29 AUGUST 2009

The BSE-Sensex is once again attempting to decisively break out (thumb rule is 3%) of a resistance level of 15,750. It ended the week at 15927, for a gain of 687 points over the week. The biggest contributor to the 687 point gain was RIL, which chipped in 152 of those points, followed by Infosys, with 106. The three stocks which had a negative contribution were ONGC, Tata Steel (because of a huge Q1 loss) and HDFC Bank, but with minor negative contributions, which indicates the positive mood of investors. The NSE-Nifty gained 203 points over the week, to end at 4732, a chin's distance away from the resistance bar of 4750.

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It seems that the market is readying for a breach of these resistance levels, though one can't foresee any particular domestic event that could trigger it. Flow of funds to stockmarket, from both domestic and foreign sources, would propel the rally. The flow of individual housing savings going into financial assets (including stocks) in the year ended Mar 09, has fallen sharply, as investors lost confidence in the equity market. As confidence returns, so will the flow of domestic household savings.

The failure of the monsoon would result in a drop of between 5 and 20% of the kharif crop, which could largely be made up in the winter rabi. The impact, therefore, of this drop, on GDP growth would be between 0.5 to 1% of GDP.

Globally, too, most countries seem to be coming out of recession; their problem would be how to reduce the fiscal deficits built up because of the fiscal and monetary injections to sustain spending. Politics can also play a part, such as in Japan, which is going for elections this weekend and may perhaps see an end to the rule of LDP, and its crony capitalism ways that have resisted reforms. In contrast, the Finance Minister has stated that it would be further economic reforms that would push India's GDP growth to 9%, up from the estimated 6% this year.

In corporate news, the Supreme Court has, in the Ambani gas dispute, dispensed with preliminary hearings which were to start on Sep 1, and will now hear final arguments from October 20 after both sides make written submissions. It ought, then, to give a judgement fast. Gas production can, by itself, contribute significantly to GDP growth. Besides this, it is imperitive that gas flows quickly, to replace coal in power production as it generates half the carbon emissions that coal does. It can also benefit parts of India that have been neglected in economic development, such as the North East.

For example, Oil India, which is making an IPO of 11% of post issue equity, at a price band of Rs 950 to Rs 1050, to raise between Rs 2500-2800 crores, is negotiating to sell some of the gas to a refinery in the North East, to replace naptha. This benefits the refinery in terms of both cost and environment. The gas will be piped in a pipeline, to design, lay and operate which Oil India has developed expertise. The issue, which should be well received, would also provide a currency to Oil India for inorganic growth through acquisition.

At the IPO analyst meet, the Chairman of Oil India said that the Government, heeding the concerns expressed by upstream energy companies about sharing of petro products subsidy, has agreed to limit such sharing to petrol and diesel, and not for LPG and kerosene. The subsidy sharing burden for ONGC and OIL would thus come down, raising profits. ONGC has also struck a new gas find in Tripura.

In corporate results Tata Steel came out with a bigger than expected loss of Rs 2209 crores in Q1 ended Jun 09, thanks mainly to a nearly 40% drop in steel prices. HCL Technologies put on a good show, with a 110% increase in profits on a 21% increase in revenue.

Foreign investor interest in the NELP VIII has been unaffected by the Ambani dispute and there has reportedly been participation from majors such as Exxon Mobil, Conoco Philips, BP, Total and Chevron.

There is also investor interest in our exchanges, as evidenced by the reported willingness of 6 entities, including private equity players and sovereign funds, in taking up 5% stake each in MCX-SX, the newly established equity market.

It thus looks like the resistance levels of 15750 on the sensex and 4750 on the Nifty, would be breached in the coming week. What would be the trigger for this is anybody's guess. One hopes that the Government now musters up the courage to push through economic reforms at a faster pace. After all, with the main opposition party, the BJP, in self destruct mode, and the Left parties licking their tails, if Congress cannot muster up the gumption to push ahead boldly now, when will it ever be able to?

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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2 Responses to "Is the market breaking out?"
Prakash Mirpuri
Aug 30, 2009
The facts , fiqures and analysis make the article like a fortune tellers crystal ball.
Great! Keep it up.
col kirit joshipura
Aug 29, 2009

Enjoy reading.Helps me take decisions. Pl keep sendind.

Equitymaster requests your view! Post a comment on "Is the market breaking out?". Click here!