Equity markets closed higher after Moody’s rating upgrade but this week movement is crucial!

Following is the English transcript of the article published in Economic Times section of Navbharat Times by Ashish Kyal, CMT published today morning before markets opened.

Moody’s upgraded India credit rating after more than a decade. This is a positive sign both for Indian economy and equity markets from long term perspective. However, valuation concerns remain over short term.

Previously, India rating upgrade by Moody’s happened in 2004 but market showed an up move only for temporary period thereby forming a medium term top which was intact over next few months. So, the extreme bullish optimism that is now prevailing should be seen with caution as valuations continue to be expensive. It is better to invest in stocks that have strong earnings potential and lower debt burden.

Bank Recapitalization doze – After the Bank recapitalization announcement by Finance minister in October of this year we saw sharp rise in stock prices of PSU banking stocks like SBI, PNB, Bank of Baroda, etc. But this only reflects how capital starved banking sector is due to NPA issues. So only recapitalization is not the solution but unless banking sector can reduce their NPA burden and form strong strategy to increase loan off take to quality borrowers the recapitalization can only result into a temporary boost.

Banking performance in coming quarters – It is vital to see if banking stocks over next few quarters can show better results and manages the NPA issue. Lot of money has come into the banking system after Demonetization and Recapitalization but quality loan off take, corporate governance and efficient management is very important.

Banking index: Bank Nifty that tracks the stock price performance of Banking stocks has touched new life time highs and closed at 25728 levels in previous week. PSU and private sector banks both contributed to the rise. One should keep a track on Banking index as this is a leading indicator to see if the ongoing trend is maturing or if there is more steam left in the current rally.

Technical perspective: From technical perspective Sensex had a big Gap up opening on 17th November after Moody’s credit rating upgrade. However, index closed the day at 33342 after touching intraday high of 33520 levels. So some selling was seen at higher levels. For positive trend to continue we should now protect the short term support of 33000 levels.

Week ahead: It is important to see if the Gap of Friday can be protected over next few days else the positive event of ratings upgrade which was awaited for more than a year will only result a spike top. Move above 33520 is required for an up move to resume. In this week we can expect some consolidation between 33520 and 33000 levels before a trending move can be seen!