Bubble in the Making?

The markets closed firm this week on the back of good quarterly results and good global ques. Sensex made a new thirteen month high at 15732.

The liquidity easing has led to a spurt of new QIPs, IPOs and GDR issues. It seems the lessons of the past have been forgotten with huge IPOs like Adani Power being oversubscribed around 20 times. The IPO size itself is about 2500 crores.

We have the NHPC IPO (size to be about 6000 crores) in August lined up which will further suck up liquidity. The markets will not crash immediately, as it is in the vested interests to keep the markets buoyant till all the money is collected.

The QIP issues are targeting another 40000 crores to be raised.

The primary market sucking out money means the secondary equity markets will not run away from here. The range for Nifty in August may well be 4950-4250 (Sensex 16700-14300).

Nifty EPS is now Rs 221. So on Friday closing we are at a P/E of about 21. A P/E of above 20 signals we are in danger zone and above 23 in bubble territory.

The US GDP contracted only 1 pc as against an expectation of 2 pc. We have the Newsweek declaring the recession over and Obama coming up with a Mission Accomplished statement. We may well be in for a surprise as this recession could be a W shaped recession. I rule out L or U shaped recovery. Only 2 possibilities exist now a V or W shaped recession.

Check my post:

http://money-manthan.blogspot.com/2009/05/u-v-w-or-l.html

The unemployment rate is expected to rise to 10 pc. This in real terms would mean an unemployment rate of about 15-17 pc.

If the recession continues from here, the sentiment would be more badly damaged than the actual economic fallout. Throwing more money to fix the existing mess caused by liquidity is never a solution. We are entering a season of utmost caution. The triggers for August would be confirmation of monsoons and global cues with the results season out of the way.

I don’t expect any major correction in August but September is a different ball game altogether.

Technically speaking, Vivek Patil speaks of a double diametric formation with a last upmove ongoing followed by a correction of about 10 pc.

The indicators like William%R are all highly overbought, with Stochastic showing a sell signal. The MACD still signals continuation of the uptrend. 4427 would be critical support, with 3 DEMA at 4594, 5DEMA at 4571, 10 DEMA at 4510 and 20 DEMA at 4429.

Resistance for the month comes at 4950 with support at 4050.

One more indication of reversal would be retracement of climb from 4420 to 4671 in shorter time than the time for up move. The up move has taken almost 3 days so far.

Weekly resistance comes at 4730. Trade with caution.