Mkts optimistic; 5-6% rally likely

We were okay yesterday:

Yes, we were trading above 5,000 which is important. I think there is a little more confidence in the trading fraternity right now, because we spent a couple of days above 5,000, and this time its not been a touch 5,000 and rush back to 4,500 kind of move. If you ask people on the street, they are sounding a little more hopeful, not completely confident yet and justifiably so and thankfully so but at least there is a small sense of optimism building up that maybe the May series may not be as bad and in the near-term maybe we can see slightly higher levels.

There is an edge to the market with the news flow and fundamentals because the news flow is not exactly great to what’s going around. So keep fingers crossed, we don’t know how much there is to this up move but we are in the midst of one, and the sentiment is a little better then what we saw last month but we don’t know it could all change on a dime.

Asian Indices

The US had a mild set back but Asia is not picking it up this morning. The Nikkei is up 1.25%, China is 3% up although that is a volatile market. Korea is up 1%, Hang Seng is up 1% and Taiwan is up 0.5% as well, so things are good across Asia. All of them good holding 1% rallies.

How is this series is wrapping up?

Rollovers are strong, much stronger than the last series, 56% done on the Nifty already. The one thing which has happened over the last few days is that the 5,000 Nifty bears have covered up their positions, that was the big trade in the market, everybody wrote calls at 5,000, that was the ceiling over the market’s head and because we have gone there several times and retraced from there but this time we have clawed above that and we are staying above it.

So the trade of the last few weeks, that’s part of the reason why the market is not slipping, is that that bear camp probably had to cover up its positions. What it has resulted in also is that the Put Call ratio (PCR) has moved to 1.35. Iif we go back and see the last few times the market had rallies, we went into something like 1.4 to 1.44 on the PCR so maybe there is a bit more left, as in a further unwind of the call writing scenario, maybe the put call ratio moves up another 10 basis points form here, maybe goes towards 1.4 or 1.5, that is typically where rallies or markets tend to get  slightly over bought and over exuberant and rallies tend to peter off. There is nothing sacrosanct about those PCR levels.

We have just got some historical indication from our market internal, it’s only that but it has been a fairly reliable one in the last few months. I think that is suggesting is that maybe a bit more short covering is left, much of it is done and in the near term maybe when the new series builds unless there is any global setback the market can probably edge up a bit higher.

The other thing which has happened is that you are seeing momentum opening up in the market after a while, all through this move from 4500 to  5,000, you have seen different classes of beaten down stocks participate but not the momentum  brigade, which is your five bellwethers, IFCI, RNRL, TTML, JP Hydro, those kinds of stocks, and they have moved quite a bit yesterday, and 5 crore stocks got added in open interest. We are coming to a phase where traders are also getting emboldened and saying we have killed 5,000, there is more upside, so lets latch on to our 5 darlings and trade them up another 10%-15%-20%. The internals are suggesting that people are sniffing a little more upside in the market but that’s internals and that is historical information for whatever little its worth.

How is the market looking for the future?

Don’t know; I am quite confused because the screen is suggesting that it could be another 5-6% left in this rally at least but that could change on a dime; some bad inflation data and some bad earnings.

I think the markets still quite edgy. It’s not like everybody is heaving a sigh of relief and saying, “we killed it; now straight away 6,000 next on the Nifty.” That’s not the mood? The mood is okay we have clawed back, we are not in danger of breaking 4,500 again and can we trade this rally a bit longer? That seems to be general sentiment and the answer to that from most traders seems to be “maybe we can get back to those pre-budget levels of 5,300-5,400 on the Nifty.” I think that is the limit of the upside that most people are trading for at least for the first half of the May series which is what has lead to such a big rollover in the Nifty.

We are at 50:50 now another 300 odd points; is it possible 5-6-7%?  I would reckon yes; if the global markets do not collapse from here and we could get to probably more than 17,000-17,500 on the Sensex if the global markets don’t turn because the local sentiment is supportive of the market edging up a bit higher.

But fingers crossed completely; we have had good 12%-13% rally from the lows. It  is entirely possible that getting in if one is going long closer to the higher end of the trading band and one does not want to be holding the baby if the tide turns suddenly against you.

One needs to be a bit cautious about going long from hereon because one has got 12-13% already in the price behind belt. So there is an added element of risk in the market which one needs to be cognisant about. But I do not know where it will go, I am completely confused.

If one just looks at what is going around us; earnings weakening and will probably weaken more in the US, we still haven’t hit recession yet, who knows what’s going on in China, crude is at USD 120/bbl and global inflation is an issue in many parts of the world, so I think we are skating fast but its on thin ice and don’t know when ice will give in and it’s a tough call but the equity markets have been remarkably resilient and I hope the equity market is right in the sense that it is telling you the bad news is in the price and we are ready to move up from here, the worst is in place and if that pans out I will be happy but the head is still not saying that thumping yes that we are out of the woods.

So one should keep an eye on others things which are happening, some very key earnings in the US are falling off indicating a key distress and the dollar is weakening once again. I hope the foreign exchange market is only weakening because of expected Fed rate cuts and I hope it’s not the case that the foreign exchange market and the equity markets in the US have different takes on what the US economy will move like in the foreseeable future. If that is the case then one must be careful because sometimes a foreign exchange market going by past history, get it a bit better than the equity markets