INDIAN STOCK MARKET – AN OUTLOOK

By Sundaramurthy Vadivelu

Important Disclosure

The views expressed below are the opinions of the author based on the principles of technical analysis, a science that has been tested and proven for more than hundred years. The views are unbiased and informative in nature. These do not constitute an offer to buy or sell stocks. Every effort has been made by the author to ensure correctness of the information presented. The author cannot be held responsible for omissions, mistakes etc.

Investing or trading in stock markets is a high risk activity. Those who cannot afford to risk their money should refrain from dealing in stocks.

The author has no vested interest in any of the stocks mentioned. He and/or his close associates may or may not be having positions at the time of writing this article.

The reader needs to understand that this article is purely for informative purposes only and all transactions, if entered into by him will be solely at his risk. The author does not guarantee that the projected targets will be achieved within the stipulated time frame.

Source for the price data displayed in graphics and tables:

National Stock Exchange of India Limited, Mumbai, India (www.nseindia.com)

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In this article let us analyze the current market scenario, how Nifty has performed during last 4 years and comparison of index vis a vis some of the individual index stocks.

Current Scenario:

As of now, there is no significant threat to the indices. No major reversal sign has been observed in the monthly charts of Nifty. Watch the reversal patterns displayed in the chart below. Bearish “three outside down” pattern occurred in April 2000 and bullish “three outside up” pattern was seen in June 2003. Since then, Indian markets are on a high.

In the absence of strong reversal signs, it may be concluded that markets will continue their uptrend.

Wave analysis:

The following table illustrates the wave count and their retracements:

This means that after the completion of the 5th wave (which needs a confirmation) a downtrend is likely to begin.

The longer term target for the Nifty, when calculated from a low of 920, works out to 4600. This will give wave 5 a gain of 177.20%.

What is the reason behind this huge rise in index?

Like all other financial markets, Indian markets are also governed by the fundamental principles of demand and supply gap. When interest rates were lowered, stock market looked an attractive option and investors began to look for opportunities. Huge foreign funds are another reason for the upsurge. Liquidity is one more factor – one can easily transact with a click of a mouse unlike the old days when physical share certificates were in use.

Whatever be the reason behind any move, it is always reflected in the charts. All other factors, namely, business conditions, economy growth etc. are always discounted when analyzing the market technically.

How many stocks got benefited from this nearly five fold rise in index in the last 4 years? Let us analyze some of the index stocks.

* Adjusted Close 1 due to stock split / bonus / rights issue

** Close 1 as on 31/07/2004

*** Close 1 as on 31/08/2003

It can been seen from the above table that not all the index stocks have performed in the same manner. ABB, BHARTIARTL and SAIL have outperformed when compared to the overall index.

It should be noted here, that the ‘performance’ in stock market by a scrip has nothing to do with the financial performance of the company. It just implies that the investors have chased this stock more strongly compared to the rest.

We can see no direct relationship between the overall index performance and the individual stocks’ performance. This indicates the demand and supply gap scenario for the stocks discussed.

What could be the reason for the uneven performance?

The price of a particular stock on a given day is decided by the market participants. They are

FII’s or the foreign institutional investors FI’s or the financial institutions MF’s or the mutual funds Long term investors Medium term investors Short term investors Day traders Speculators Punters Derivative traders

When thousands of people are trading a particular stock, no one can be very clear of what the other trader thinks. This leads to volatility and uncertainty in the markets.

When one person buys a stock, obvious reason is that he thinks that it will go up. The person who sold the stock thought that it would either go down or he had enough profit or loss.

In a complex scenario like this, price fluctuations happen regularly. The investor needs to take advantage of the situation by buying when the demand just starts picking up for the stock and sell when it just starts diminishing.

Having said that it is difficult for an ordinary investor to completely understand and assess the market status.

What can the investor do now?

Ideally, one would like to take some money home. If one has remained a long term investor and likely to get some profit, he can book it.

Remember that the chance of the profit going down may increase with the time a stock being held.

For the one who wants to invest for long term in stocks, he has to be cautious, as can be seen from the charts and tables provided.

Some thoughts on investing in stocks:

Not too many people understand the stock market dynamics. So take professional advice, consult a qualified and experienced person. He may charge you a little, but it is worth taking the risk than worrying later.

Invest the amount that you can afford to lose. There are only probabilities, no certainties in financial markets.

Keep doing your research. Observe prices at least once a week. If you think you gained a reasonable amount, book your profits at least partially.

Last but not least, never borrow money to invest in stocks thinking that prices will always go up!

Good luck.