The Week Ahead: Best week in 2012 as Nifty regains 200-day average

We should see NSE Nifty consolidate this week after a stellar 4.68 per cent run up last week. The next resistance is seen at 5190/5200 which is the 100 day moving average or DMA and support now at 4925 the 20 DMA. The sharp rally has caught most players unaware and any pull back will be used as a buying opportunity.

The Nifty pulled back from being on the “Verge of breakdown” as it rallied from Monday’s swing lows of 4770 to end the week at 5068 up 4.68% for the week making it the best weekly gains in 2012. In doing so, it also regained the 200 DMA at 5064, a show of strength.

As written last week the Nifty was on a “make or break” point and with the smart money stepping in, we saw a break out in the positive on the back of improving local situation. This is largely due to oil and commodities falling and bond yields also at one year lows. The rally last week will bear semblance to the similar starting point of the “monster rally” we saw in early January which took the Nifty up 23 per cent from its December 2011 lows.

However, this recent rally may not have the desired strength as even though the sharp sell-off in oil prices is a huge positive it is negated by the sharp depreciation in the value of the rupee. Also, globally things have only got worse with Euro zone turmoil, China slowdown and poor US data.

The nature of the stock markets is to discount news faster than the rest. The recent rally will bear testimony to the fact that with rupee weakness, government policy indecisions, poor global environment and a very weak sentiment, we seem to be ignoring the positives. These include low current account deficit due to low oil prices and less gold imports. There is also hope of better government policy action coupled with RBI easing interest rates. The sceptics will call this a ‘one off’ short covering rally as domestically and globally the environment continues to be challenging.

The next week will again see how Europe rallies around Spain as that seems the next ‘bail out’ candidate. Also, the next weekend, we get Greece election results. RBI credit policy on the 18 June 2012. The rally was led by Capital Goods, Banks and Reality while FMCG and Pharma lagged indicating the return of “Risk On trade” by buying High beta and selling defensives.

The Nifty has shown that close to 4770/4800 the long term money will continue to buy as valuations seem very compelling and also the Markets seem “relatively cheap” trading at 12 times forward multiples which historically has been the lowest in the recent decade.

Factors To Watch:

1. Nifty to test 100dma @ 5192 & support @ 4925.

2. Oil price weakness.

3. Rupee to start showing strength, with positive inflows by Fii’s.

4. Bond Yields @ 8.32 per cent lowest in a year.

5. Inflation data to be sticky due to seasonal factors.

6. Spain in “the eye of the storm” for another week running.

7. Expectation of government after presidential election.