This was a truncated week for the markets. The Nifty moved up by 1.6 pc, the FIIs remained net sellers and there are expectations of no major moves in the holiday season. But, stock markets are known to surprise and we never know what is in store. Lets examine the fundamental and technical factors at play here.
1. On the Domestic front, the the 2G scam got murkier, the CBI made a show of taking action.What could queer the pitch if A Raja actually gets arrested next week. There are 2 possibilities if this arrest is made. One is DMK drops Raja like a hot potato and life goes on. I feel this is more likely because elections in Tamil Nadu are just round the corner in May 2011, and the DMK needs the Congress as much as the Congress needs it.Breaking the alliance would immediately reduce DMK to a minority government at the State level and a hostile Jayalalita is waiting in the wings. On the other hand, if the DMK withdraws support the markets will go for a toss.
2. Industry leaders like Deepak Parekh and Rata Tata have openly come out and voiced concern over the phone tapping.This is the first time, that senior industry voices have raised their voices against government policy. This only underscores the seriousness of the issues in debate. The FIIs are only concerned on the return of their investments. As recent data has shown they may withdraw the capital at the slightest whiff of trouble.
3. The Korean peninsula is the joker in the pack. North Korea has issued an open ultimatum to S. Korea,, that if they go ahead with the war games, there would retaliatory attacks. One never knows where this will all end in.
4. Europe remains in a state of flux. The Spanish bond yield in comparison to the German bond yield, the spreads have widened. These spreads are usually the first indication of trouble.
5. The advance tax numbers have been good, but that is history now. Crude oil has been consistently trading in the 85-90 dollars band. 100 dollar crude is now a reality. The harsh winter in Europe will not help cooling down crude prices either.This will lead to further fuel price hikes, spiraling inflation and rate hikes by the RBI.
6. The spate of lending rate hikes and hike in the fixed deposit rates are a sure sign that the rate hikes by the government are beginning to hurt the Banks bottom line.
7. Nifty Open Interest shows strong support at 5800 and strong resistance at 6000. I would watch the 6000 levels very closely as above that, a fresh leg of up move is on the cards. Short below 5875 and long above 6000.
8. I am bullish on gold, crude, government FPOs and bearish on banks, automobiles.
To sum it up, expect range bound movement, a big fall in case of unexpected news and the action to be played out in Jan. The selling by FIIs caps the upside. Decembers have been generally positive months for the markets over the past so many years. The year end bonuses are decided on the NAV values.