The sensex closed 150 points up led by a huge 95-point move on Tuesday after a weak Monday. In all we have had a 600-point rise over the past eigth weeks. The last big rally of November and December ended on the ninth week after a 600-point rally. Are we due for a reversal next week' The odds are very high. On reviewing weekly data of the past 10 years, I find we have never had a bull-run beyond eight to 10 weeks without significant correction. If we do get a pullback how low do we go' I would say about 200 points spread over a week or two before we resume the climb. The most likely scenario is that the rally will stall now and a gentle rollover will begin, even more so if overseas markets weaken. After the smaller stocks, now the heavyweights have made a terrific run over the past few weeks. It will take a big leap of faith to keep them going.
The rally has been triggered by the massive buying by foreign institutional investors and aided by one interested business group that has made its stock flare up. CNBC cheerfully tells us that FIIs seemed to have put in their second biggest monthly investment in India after February 2002.
It may pay to remember that February 2002 was a significant top for the market at 3758 and we are still a long way from it. FIIs have that ability to create a market top. This is not to say that we are making a major top here. Only that we are certainly close to a pullback.
Another interesting indicator to consider is volumes. After a huge surge in prices last Tuesday when the market rose 95 points, volumes fell in each day of the subsequent days even as the market has headed higher pulled up by pivotals like ITC and Reliance. The market movement has been so decisive that I suspect we will have many buyers waiting to jump in as the market weakens. In those up days, volumes will tell us whether we have in for a sustained rise.
Over the next few weeks it will be worthwhile to see if we do go much higher than 3550. If we do, either in this attempt or in the next (after a correction), we will hit 3800, which would possibly be a top for the year. For this week watch out for a break of 3450 that could signal a change in trend. In short, the market may sell off after Tuesday afternoon and remain choppy thereafter, finding support at 3300. The subsequent price action may tell us what to expect for the rest of the year. Among stocks, HPCL, BPCL, ITC and Tisco look strong while Hero Honda and software stocks look weak.