Sensex long term analysis:
Sensex has been moving in a big triangle consolidation pattern since 2008 onwards. The top made in January 2008 near 21200 was recently taken out in the month of November on the day ofDiwali Muharat trading & Sensex registered a high near 21320 levels. After touching life time highs we can see a fall of more than 1100 points. But on last Thursday again there was sharp rise and it seems the index is ready to touch the life time high levels again.
Both September and October months have shown positive closes and has also taken out the previous month’s high. This keeps the monthly bias positive and November monthly close above 21300 will be the confirmation of the start of new Bull trend. However, it will be important to see if the overall momentum increases with violent moves on upside and participation from the overall broader market which is important for confirmation of the next Bull trend scenario.
Over here itself we have mentioned few weeks back about Sensex touching new highs and it did exactly as expected. Upside momentum and increase in volumes will be very important during this period.
Economic cycle analysis:Interest rate cycle clearly shows that major bottoms in markets are formed during the period of reducing interest rates and the major tops are formed when interest rates are at highs. From Economic cycle perspective this also makes sense. In a normal inflationary environment it is the Bond market that tops out prior to Equity and later followed by Commodities i.e. Bond – Equities – Commodities. Also logically once the economy starts to heat up central bank starts increasing the interest rates to cool down the economy. This results in Bond topping out earlier than Equity market. This topping cycle was clearly visible during the 2006 - 2008 topping process as well. From Indian context, we think the interest rate cycle has already topped out in 2012 when we had interest rates near 8.5%. Since then we can see that interest rates have slowly come down but only it to be increased by 50 bps over past 2 months. However the current repo rate currently stands at 7.75% which is well below 8.5% top created in 2012. The interest rate cycle should now continue its downtrend and eventually Equity should start moving up. So from Economic cycle perspective Equity markets are due for an uptrend.
Stock Selection:From stock selection perspective the stocks that can outperform during the next uptrend can be Reliance Industries, SBI, L&T, Tatamotors to name a few. Reliance Industrieshas been in a consolidation since 2008 till date and move above 930 will be first positive confirmation for this stock. Similarly for SBI move above 1900 will be an important positive confirmation. Tatamotors is already near life time highs and is outperforming broader market. This stock can continue to outperform for months to come.
Week ahead: In short, given the strong reversal on Friday this week looks to be positive. On downside 20100 is very important support over short term and 19300 is crucial level from medium term perspective. Move above Thursday’s high of 20600 will continue the positivity and further above 21000 can result into life time highs again!
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