Exercise caution before fresh buys

Post-budget rally is likely to be short-lived as it’s based on hopes, not on core fundamentals

The Union Budget for 2016-17 presented by the Finance Minister Arun Jaitley on Monday was termed as a non-event by most of the market experts, but the stock markets logged their biggest weekly gain since 2011, post its presentation. Since it increased dividend distribution tax and also raised STT on options contracts as well as introduced a 10 per cent tax on the dividend receipts over and above Rs 10 lakh, the budget was described as a negative one from view-point of the stock markets.

But still a few positives in it pulled the markets up led by banking company stocks and aided by global cues. The estimates of revenue deficit as made by Jaitley to remain at around 3.8 percent, increased hopes of the inflation to remaining under check and that in turn, raised hopes of an interest rate cut by Reserve Bank of India at the earliest. It was this rate-cut hope and also relaxation as announced by the apex bank for the banking sector in meeting Basel III norms that sent the banking stocks significantly up.

The banking stocks then led the entire markets up and above 24000 mark. The most effective factor that drove the markets up was the return of the foreign institutional investors (FIIs) as net buyers. The FIIs that had been net sellers in every day in the past many months turned net buyers and that too on large scale. On Tuesday, the very next day of the presentation of the budget, these cash-rich buyers mopped up shares worth more than Rs 2,000 crore.

Besides a rate cut hope and recapitalisation of the banking sector with a budgetary provision of Rs 25000 crore, the market men were enthused to buy with an assumption that if the budget also helps economic revival then the burden of NPAs would also reduce, making banking sector healthier. The news from global peers was also encouraging as most of the leading global stock markets this week ruled buoyant on hopes of fresh stimulus packages by respective central banks.

So the last week's major jump in benchmarking indices was based more on hopes than on fundamentals and therefore more prone to be short-lived. After having risen by 777 points on Tuesday alone, the speed of the BSE Sensex going up was seen reducing. It rose by 464 points and 364 points on Wednesday and Thursday respectively before ending the week with 39 points rise on Friday. According to the technical theory, the reducing speed of the market gauge is an indication that a reversal in trend is not far away.

Besides, the BSE Sensex has formed two bullish gaps, on Wednesday and Thursday respectively, on its daily chart. According to the technical theory, any gaps on either side, though indicate an entry towards respective direction, need to be filled up if the markets have to move in the same direction for long. The banking regulator, who appeared to have adopted a soft stand over NPAs a few days ago, has once again toughened its stand against the bad loans and asked the banks to clean up books soon.

The dictation-like advice as expressed by the RBI Governor Raghuram Rajan at a function organised in Gurgaon on Friday would once again make banking stocks unattractive in short-term and therefore, send them in a correction mode. Any likely fall in banking stocks would create a negative impact on the entire markets and make then fall too. However, any such likely corrections need not be taken as reversal of trend from bullish to bearish.

With the spark that the markets have received last week, they have already changed their primary trend from bearish to bullish and with two bullish gaps, the emergence of the bullish trend is almost confirmed but to be dead-sure that it is a bullish phase ahead, the markets would need a few more supportive bullish breakouts.

Till such supportive and further bullish breakouts are not received, the prospective buyers must tread highly cautiously while making any fresh bids, and restrict their purchases to only few companies having low equity capital base and are mostly debt-free ones so that the downward risk remains the least even if the markets fail to enter a long-lasting uptrend so soon.