Earnings lift market sentiment
Any corrective move would come at 10,360, the level of Oct. 27. But, the next support comes only at 10,200, which, in the past, acted as a resistance range

Last week saw a marked improvement in market sentiment. The movement of the index was distinctly positive and the market breadth was good for the large part of the week. More sectors and more number of stocks participated in the rally.

What lifted the street sentiment was the earnings season, which is turning out to be better than what most analysts had predicted four months back. Those estimates assumed that sales would be hurt from the shift to the new tax regime.

The earnings are coming better than estimates because of a technical reason. What GST was supposed to hurt has been taken care of by early festive season sales.

But in the current quarter, results for which would come in 2018, sales might be lower in some sectors, as post-festive season sales numbers are normally subdued. Last week, some reports suggested that since car sales have slowed down a bit, other consumer facing sectors might also be facing the same issue. In some sectors, the slow down would be partially compensated by sales stuck in the system due to GST implementation getting smoothened out and the average would be taken care of.

What is noticeable in earnings is that most cement companies have managed to show growth in top line, which indicates a pick-up in volumes. So, if the demand for cement is picking up, surely sectors complimentary to the cement sector would also be seeing an increase in volume and that would reflect in their numbers in the coming quarters.

Also, last week, the increase in India’s ranking in the World Bank’s ease of doing business was reported. A notable issue was that when it came to protecting the interest of small investor, the ranking advanced to the four palce from nine. This is reflective of the steps both stock exchanges and the markets regulator have taken over the last many years. Though it might seem a non-financial aspect, robust investor protection is the backbone of any bull run, and hopefully, India would not see an end to the current bull run from a damaging scam.

In the international market, the US Fed’s rate (non)action  and change of guard at the Fed were much on the expected lines. What surprised the market was the Bank of England increasing the rate the first time in a decade. Note that the central bank is raising the rate when the United Kingdom is expected to see economic adjustment because of Brexit, which might lead to a slowdown. This indicates that global money printing machines are going to witness tightening much earlier than expected and probably these are going to be more damaging to emerging market asset prices than any other development.

If there is no major readjustment in the currency markets over the next few weeks, that would be good news for the market. But if the currency market reacts promptly, it would mean that trouble is not far for emerging equity markets.

Coming to oscillators charts, most short-term charts are now in the buy mode as they keep moving in positive territory. The moving average convergence/divergence (MACD) on the daily charts is in the buy mode as it moves up in positive territory, with the ratio between average and trigger lines now indicating continuation of the current trend. On the weekly MACD charts, a buy signal has emerged, though in this case, the ratio of difference between trigger and average lines is slightly lower than what it should be when a buy signal emerges.

The 12-day rate of change (ROC) is placed in positive territory, but it continues to slip south, indicating that while the index may rise, the pace of it would be slightly slower as compared to the recent phase of up-move. The extreme short-term indicators are in overbought territory while many of them are showing negative divergence. Another set of them still moves in sideways direction, but not many of them have given a clear sell signal.

The first support to the Nifty, in any of its corrective move, would come at 10,360, which is not very far from its closing level in the previous week (Oct 27) and any decline in the banking space would take it to that level. But more importantly, the next support level for the Nifty is 10,200, which, in the past, acted as a resistance range and the index could cross it only after three attempts. So, in the event of a correction, we might see consolidation around this level and the Nifty should not break this level for the current phase of up-move, which started from 9,759, to stay intact.

The first resistance to the Nifty would come at 10,590, after which 10,700 points is another range where we could see some profit booking, leading to some cooling off.


Rajiv Nagpal