Volatility set to rise

Market Watch

The markets are likely to be volatilite next week as the absence of any domestic triggers may lead to alternate bouts of buying and selling on the bourses.

The picture on the political front looks bright after the Left parties gave the go-ahead to the UPA government to begin talks with the International Atomic Energy Agency on Indo-US nuclear deal.

The market is at crucial technical levels. Momentum and volumes would be the key drivers for the market, going ahead. While the Nifty may continue to trade in the range of 5820 and 5970, a break on either side will determine the direction in the immediate term. A close above 5970 could take the markets to 6450 levels. But if the range continues to hold, there may be some profit taking in the next few weeks. The moving averages convergence divergence (MACD) on Nifty and Sensex charts suggests a bearish trend.

Since the participatory note issue was raised by the market regulator, foreign investors have not made big purchases. They have, in fact, been net sellers on most days.

The FII selling has not yet triggered big falls due to buying by the domestic institutions. Harjit Singh Sethi, CEO, Almondz Securities is not much worried as "though FIIs have been net sellers, they are actually churning their portfolios, shifting positions from the expensive shares to attractively valued shares."

It is this valuation-based investment strategy which has driven up the mid cap stocks. While the benchmark Sensex went up by 4.18 per cent to 19,698 points during the week, the mid cap index was up by 6.22 per cent. The oil and gas, and PSU indices also out performed the Sensex.

Not all are comfortable with the FII selling, though. "If that source of fund remains dry for some more time, the rally might loose leg," reckoned an FII broker.

When the US Fed announced a cut in interest rates on September 18, 2007, dollar weakening gained momentum and investors started looking at other alternative avenues including emerging market equities and gold.

The US is making last ditch efforts to pull back the weakening dollar. The country's treasury secretary Henry Paulson signalled to trading partners that the dollar will rebound from a record low, while predicting that it will reflect "long-term strength'' in the American economy, according to a report in news agency Bloomberg.

An FII broker with a Indian brokerage house said that "since the US interest rates are falling and dollar has also declined sharply against major currencies, the US market might become attractive and some money might flow there." But this development will be short term in nature, as the weakening dollar and attractiveness of momentum markets will again bring India on the FII radar.