Market Direction: Important triggers

Efficient Market theory advocates that human beings behave rationally and the markets always behave efficiently. But this is not true most of the times. Human beings rarely behave rationally as a group. The markets always look for market triggers: positive or negative to find their direction, in the short term. Let us find out what are the triggers for the market at this juncture:

• Results for FY 07-08: Currently the results are playing a major role in deciding the immediate course of the markets. As the results of majority of the companies have been better than expectations, markets have moved up about 20% from their March lows. This also is the time for portfolio churning based on the annual returns of the companies.
• Progress of Monsoon: Indian economy is very much dependent upon the monsoon. The markets will start discounting the progress of monsoon from the end of May. The predictions by the IMD are for a normal monsoon this year, if it holds good than the stock market will have a sustained rally in the months to come.
• Inflation: The government is doing everything to contain inflation, but the results have not been reflected in the inflation data so far, which continues to be a source of worry for the markets. Although the foodgrain prices have started to soften, the prices of crude oil and basic commodities like steel and cement continue to rise globally and the govt. can do very little in this regard. The artificial reduction in prices through force will only worsen the situation, unless supply concerns are met.
• Exchange Rate: The Rupee have depreciated against most currencies in the recent past and has recently breached the Rs41/ dollar mark recently. With crude oil ruling at all time highs of over 120$/ barrel mark, it does not auger well for the Indian economy as we are a large net importer of petroleum products. This will put a lot of pressure on our budgetary deficit and fuel inflation. But it augers well for certain sectors like oil exploration and refineries as their margins would improve. But public sector companies will continue to bleed because of faulty pricing mechanism followed by the govt.

Overall the markets have been resilient despite the negatives, and are currently consolidating above the 17000 level on BSE and 5000 on the NIFTY. In the absence of any major negative news, the medium term trend for the markets is up. But partial profit booking is advisable in the range 18200-18500 on the sensex and 5400-5450 on the NIFTY.