First Phase of the Downtrend is Over?

Till some times back, every thing looked all right. Stock markets were scaling new highs. Real Estate prices were hitting the sky. Employees were enjoying hefty bonuses and huge pay hikes. India was talking about double-digit growth.

Whatever happened then looks like a dream now because of the Subprime crisis and the consequent global recession.

Since then, stock indices have crashed out. Metals have plunged down. Real Estate prices have been brought down to earth. Multinational (Investment) Banks went bankrupt. Jobs are being lost. Governments are supporting the Banks by providing capital. Central Banks are cutting interest rates drastically and pumping in billions of dollars into the system to ease out liquidity crisis.

As of now, panic level has come down in the financial markets, which appear to be finding a bottom for the time being. Dollars are more freely available in the international markets and LIBOR level has come down significantly.

Experts feel that the first phase of the downtrend is over for the time being. The second phase will be impacting more on the economies rather than the financial markets.

Second phase of the downtrend may witness the bankruptcy (i.e. not able to service the Debt and support the imports) of countries like Argentina, Hungary and Pakistan. IMF has already stepped in to save these countries. Global economy will be slowing down in the immediate future.

Now let us review our markets.

Week that was

As we expected, there was a sharp rally in the in the equity market for the first two days supported by cutting of interest rates by the central banks across the globe and FII inflows. However with the global markets turnig negative after the US elections were over and our weekly Inflation (10.72%) being much higher than the market expectations, Sensex was not able to cross the resistance level of 10750 points decisively. Huge sell off was then witnessed taking the index back to 9600 levels. Still, Friday’s small rally of 230 points helped the Sensex to close positive for the second week in a row. The positive news for the week was the return of FII flows into our markets. Bad news is that the series of economic data released in USA confirmed that USA is grip of recession.

Rupee rallied against US Dollar after hitting a historic low of 50.15 levels in the previous week. However the bad news is that the Forex Reserves of the country dipped by another $5.5 billion for the week ended 30.10.2008.

Week Ahead

As we mentioned earlier, the panic level has come down and there is some sort of stability returning to the markets across the globe.

Arrest of FII outflows and rather some inflows into our markets too have improved the underlying sentiments

Technically, Sensex can again rise to the levels of 10800 points breaking which it may move towards 11800 points. Only precondition is that it should hold above 9600 points and in case of any fall below that level it may retest 8900 levels once again.

Traders are suggested to take position according to the global movements however with strict stop losses.

Investors are suggested to buy some blue chip stocks and public sector banks with a 3-5 years time horizon at fall, as there is limited down side from here onwards.

Rupee may consolidate around these levels as (already mentioned) there is easing of dollar demand in the international markets.

Have a nice week ahead.