Markets Weekahead: ‎Time to book profits and not be greedy

May 11, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The highlight of the past week was a stupendous 3 percent rally on Friday with the Nifty ending at a record high of 6858. Investors were in a sombre mood earlier in the week, when the market was threatening to break a crucial support level around 6650.

The sudden turn on Friday and the ferocity of the move took most participants by surprise. It was a combination of fresh buying as well as short covering which resulted in a near 200 point rally. It seemed everyone wanted to join the bandwagon due to the fear of missing a bigger rally.

A broker looks at a computer screen at a stock brokerage firm in MumbaiMacroeconomic data due in the coming week includes WPI and CPI for April. IIP data for March would be declared on Monday. In case the data is favourable, it would aid the mood on the street but a negative one will not dent the mood as all eyes would be on the exit polls which should start flowing in by the evening.

Friday’s move was restricted mostly to  large caps, especially the index stocks, but over the next few sessions we should see the rally extending to the rest of the market.

The banking sector was the biggest gainer during the week as quarterly  results were better than analyst expectations. Most analysts were skeptical of the asset quality, especially that of PSU Banks. The other reason could be the expectation of a stable government that would boost credit growth as well as improve collections due to an overall economic rebound.

The public sector sector was also in demand on expectation of management independence among public sector units.  The IT sector was under pressure, especially Infosys, after UBS downgraded the stock to a target price of 2,750 rupees from 4,050 rupees earlier. Investors were also cautious due to the expectation of an appreciation in the rupee after the formation of a new government.

The market has accounted for the immediate formation of a stable government. The coming week will see volatility with a tussle between those who believe it would be a cake walk and those who believe otherwise.

Momentum can take the Nifty above 7000 in the next four sessions but the risk-reward ratio would get skewed. Since the best of the expectation is priced in, the upside could be limited whereas in a situation of expectations not being met, the downside for the markets could be 10-15 percent.

This last leg of the election rally should be utilized as an opportunity to book profits. Though greed could overtake prudence, valuation would get a bit expensive at 16x FY15 as it would take the next two or three years to achieve a GDP growth of over 8 percent.

The uncertainty of monsoons due to El Nino effect and expectations from the new government could be its biggest bane. It’s time to take profits.

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