Review on BSE and Nifty this year

 Our celebration of Sensex’s new highs was a little muted as the 50-stock Nifty had not joined the festivities. However, last week, the two finally rocked together.

With the Nifty’s 1.77% (66-point) move, the two indices are in sync, doing the tango at new life highs. From a technical perspective, you could ask for no better confirmation that the trend across all-time frames is indisputably up.

How deep & how wide?

Let’s look at the BSE500. This 500-stock index is constructed to represent close to 93% of the total market capitalisation of the Bombay Stock Exchange (BSE). Though it contains all the market heavies (or probably because of it), the BSE500 is a bit of an elephant, and elephants, we know, can’t dance. Or can they? Consider this.

The BSE500 index is up nearly 50% from June ’06 lows, and is just a shade under its May ’06 highs. It has already posted the weekly highest closing ever. And the BSE500 has not had a negative week for the past 15 weeks, since late August ’06.

Now, if an index that covers over 93% of market capitalisation can show such strength (we are not finicky, we just round that off to 100%), it’s surely sufficient reason to think that the market is in good shape.

Sectorally speaking

Sectors that have joined frontline indices at new life highs include banking, IT, cement and the BSE Tech pack (which includes IT, media and telecom). The BSE500, BSECapgoods, BSEOil&Gas indices trade a shade under their respective May ’06 highs, and are a step away from new highs.

Sectors that significantly underperform the Sensex are FMCG, BSE Consumer Durables, Healthcare, Metals, Sugar, Mid and Small Caps. Sectoral analysis broadly suggests traders coming into the post-June ’06 rally seem to have chosen the ‘infrastructure-led growth story’ over the ‘massive middle class’ rationale.

However, as trend followers we are more concerned with the ‘how’ than the rather nebulous ‘why’. And we will continue to buy strong sectors, while looking for fresh emerging strength among the current underperformers.

Tank up

Speaking of underperforming sectors showing promise, we checked out the BSE Oil &Gas sector. This sector is buoyed by RIL’s outperformance, helped along by gains in HPCL and BPCL, that come after a 2-1/2 year bear market. Despite this, the sector underperforms, held back by ONGC’s reluctance to move.

However, this week, ONGC breaks its shackles with a 12% move. (In fact, much of the Nifty’s ascent into historical highs is thanks to this stock.) ONGC is now likely to find support from Rs 825-840 level, a range that previously resisted all gains since June ’06. Going forward, we think the stock is on a move to retest May ’06 highs at Rs 1,010. Once ONGC makes and sustains new highs of its own, we expect it to trade in the Rs 1,200-1,400 range.

Which way ahoy?

Now that the market heavyweight ONGC starts to rock, what does this imply for frontline indices? The Nifty has just edged up above 3770. The Sensex is yet to move above the equivalent level of 13135. Once these levels are firmly in place as supports, we expect the market to test 4030-4050/13500-13550 levels.

We will look for weakness only under recent lows at 3700-3725/12800-12900. For those with cold feet about buying with the market at all-time highs, these are levels to watch out for as acceptable downside risk before calling a reversal of this 4-1/2 month old upmove. Trade well. Trade wisely.

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