Markets have bottomed out

My first wish has been granted:

Dateline: 26th March 2008: BSE Sensex vaults 928 points for its 2nd highest ever gain. The pessimism seems to be gradually fading and confidence among investors seems to be returning. The past week has seen sensex gain over 9% and Nifty over 8%. Midcaps and smallcap indeces have also kept pace with the big brothers. The sensex has made a bottom in the 14700-15000 range and the Nifty in the 4450-4500 range. Value buying has clearly emerged in beaten down stocks. FIIs have been net buyers throughout the week. Mutual Funds have also started to buy aggressively. The advance decline ratios are heartening, and there has been a broad based buying in last week rallies.

However, some concerns remain on domestic growth figures. Even in a global slowdown scenario, Indian Economy should be able to post around 8% growth in GDP for FY'09. Inflation has reached a 52 week high at 6.68% for week ended 15th March, leaving the Govt. in a spot of bother. The inflation figures were out on Friday morning, but the strong sentiment in the markets tended to overlook the inflation data, and the markets gained more than 2%, the gain in midcaps and smallcaps was higher. This is how sentiments drive the markets. Let us compare global inflation data. Current inflation data of a few economies are (previous year figures are given in brackets): India 6.68 (6.56), USA 4.00 (2.40), China 8.70 (2.70), Russia 12.70 (7.60), EU 3.30 (1.80). The high inflation is a global phenomenon and is a result of the runaway commodity and food prices. Indian inflation data is following the global trends. According to anaylists commodity cycle may have reached its peak, and will start declining soon. But the shortage of food articles will tend to keep the prices of foodgrains high. It will be in India's interest to give utmost importance to 'Food Security', if we have to keep our growth story intact. In India inflation is more of a political issue than an economic issue, so invariably we tend to overlook the ground realities while assessing a sensitive issue like inflation.

The markets will continue to move in tandem with the global markets for most of the next week. The week thereafter, focus will shift on 4th quarter results of our companies which should give a positive fillip to the markets. Any dip in the markets during the week should be seen as a buying opportunity for long term investors. The inflation figures will be watched with anxiety, so will be the IIP numbers for February. There could be a positive surprize in store!

As far as the trend reversal that has started from around 14800 levels on the sensex, it has a potential for retracement of upto 50%/61%/75% of the decline from the peak level of 21200 reached on 8th January 08. These levels on the sensex are 18000/ 18700/ 19600 respectively. The sensex has a potential to touch these levels in the next 2 months. Till then investors may hold on to their stocks firmly. Profit booking, if any, may be taken up at these levels. However, we need to have a closer look at inflation figures, because RBI's policy on interest rates will be guided by these figures.