Challenging time for mkts amid negative global cues

The circumstances are not supportive at all this morning:

No, they are not supportive and it’s unfortunate that after the first day of that pullback we get pegged back with several bad cues from overseas. The start may not be good; there might still be an attempt to claw back and carry on with the rally after yesterday which was primarily a short covering rally because at least the bulls would try to ensure that it was not just the one-off and the market does not get the sense that it is just a one-off which fizzles off with one passing day.

We could see a bit of volatility and bulls may not throw in the towel initially after the first cut in the morning but let see where we go from here. I think the headwinds are strong at this point in time. So if the market has to move up more from here which is a possibility, at least a bit more then I think one will have to see more aggressive short covering. I do not think there is serious buying which is happening yet in the market. It is going to be challenging for the market to move up significantly higher from here. A bit more is possible but that depends more on the bears than on the bulls.  

Asian Indices:

Asia had a very rough day yesterday but today it has not reacted nearly as much to the US sell off and the crude spikes. The Nikkei is actually clawed back into the green, Chinese market which slipped yesterday is up about 1%, Hang Seng has cut its losses, the early morning losses were about 350 points and now it is down to just about 60. Taiwan remains very sticky, 1.3% down and Korea is down about 1%. So Asia is not doing terribly badly this morning under the circumstances.

It ran really hard and really fast yesterday, so what does one expect for the Nifty in the near-term now?

It is tough to say because the picture has been muddied a little bit by what has happened overnight, the Dow breaking down, crude going up to USD 144/bbl-USD 145/bbl these are headwinds for us and they make things only worse, crude certainly does.

We went to 4,100 yesterday, so in the near-term will it start a bit weak? I suspect so. If it does and goes back closer to 4,000-4,050 kind of levels then we have to see whether it gets support there and tries to resume this pullback rally, which takes it somewhere closer to that last important level that it broke which was 4,300 kind of levels. So it is possible that it goes there but I do not think it will be easy because we have had a fairly significant bounce yesterday, it was led almost entirely by short covering. It does not look like there was any great genuine buying, which had happened out there.

It is tough to say what is going to go on, maybe we have to see a touch of volatility right now. Did yesterday’s rally indicate that the Nifty is completely out of the woods and ready to rally on and it is firmly put a bottom in place? - I doubt it. I think this time around when a bottom is formed you will probably see more of a base building kind of an exercise, a V-shaped pullback from the lows probably will not indicate a bottom formation this time around because that is typically how bear market bottoms are not phased. I do not know whether we go back and retest and break those levels in the next few days or we go to 4,300 but we are not quite out of the woods yet.  

There seems to be the expectation that either the Center will get away with what’s happened up until now or there will be a quick resolution, did that in some part help what was happening with the market?

For a market which was furiously covering shorts, any positive news can actually lead to an acceleration of that short covering trend, that might have happened but I am not sure that the rally yesterday was parked entirely by good political news. I think it was a technical bounce, which was overdue in any case. It probably started off with a little bit of buying at the lower ends of 12,800 and then the shorts started covering because there were plenty of shorts to be covered there.

On the political front does it look likely or possible now that the government does not fall if the Left withdraws support because of some kind of an alliance which the United Progressive Alliance (UPA) is trying to cobble up with the Samajwadi Party (SP) that may well be the case, in which case the market’s near-term fear, the knee-jerk fear that the government falls in the next few days and weeks that might get postponed and elections might actually happen in early part of next year.

In the near-term can that sort of evade the knee-jerk which the market fears? - It certainly could. In the medium-term will the market take that as a huge positive? - I doubt it very much. The bigger resolution which the markets wants to see is the end of the elections which is looming whether in 3 months, whether in 6 months or in 9 months and a new political formation whichever it is to come at the Center and therefore you don’t worry about politics for a bit, that resolution I think is now getting postponed and in a sense the uncertainty gets postponed if some kind of a makeshift alliance is cobbled up for the moment.

So is it a two day positive, can we avoid that knee-jerk sell off, which almost inevitably will happen if the government fall? - That may well be the case but in the medium-term, I think the uncertainty lingers and beyond a day or two, I don’t think this will come as a big relief if the current formation actually comes through.