The bearish sentiment will be reinforced by concerns about Iraq and a poor macro-economic outlook
Vague uneasiness about the tech sector hardened into panic on Thursday. The trigger was of course, the pessimistic Infosys earnings estimates for 2004.
The bloodbath was incredible. Heavy selling in IT stocks pulled the market down sharply. The Sensex ended down 5.36 per cent at 2997. 87 points. The Nifty was down 6.6 per cent at 949.8 while the Defty lost 6.59 per cent.
The broad-based BSE500 lost 4.3 per cent. Declines outweighed advances and volumes were extremely high - unusual when prices are dropping. The Put-Call ratio rose briefly above 0.65 before dipping back into neutral territory at 0.49.
Outlook: The indices have decisively dipped below what seemed to be strong support at Nifty 960/Sensex 3000. The likeliest behaviour is a pullback followed by a further dip. The erstwhile support levels will now act as a resistance. The next support seems to be around 920/2850 and the downmove should reach those levels sometime next week.
Rationale: The breakout came on extremely high volumes. This is usually a sign of validity. The bearishness is likely to be reinforced by concerns about Iraq, and a generally poor macro-economic outlook.
Counter view: There is a small chance that bargain hunters will trigger a big bounce. Any move that closes above 960/3010 will probably signal a rally till around the 990/3065 levels. This doesn't seem likely, but you never know.
Bulls and Bears: There were very few bullish stocks left after two days of carnage. Given the likelihood of a small technical bounce followed by a further drop next week, it may make sense to either stay short or stay out until at least 930 Nifty levels are reached.
PSU banks look to be a haven; most recovered on Friday after dropping on Thursday. There could also be a little action in power stocks like ABB, Bhel, BSES and Tata Power, which held their values on Friday. Great Eastern Shipping and SCI remained on an uptrend.
Most pharma stocks got hammered on Friday after holding their ground on Thursday. Ranbaxy and Sun Pharma were exceptions and both may be worth holding. Presumably the key to recovery will lie with a re-rating of IT stocks.
This could come on the basis of short-covering and bargain-hunting. About the most solid appear to be HCL Tech, Hughes Software and HCL Info. A more detailed analysis of several tech-majors is given below.
Derivatives naturally saw even greater volatility than the spot market. Infy Puts climbed 2500 per cent in a single session. The chances are that the market will now settle down in a more normal groove.
Oddly enough, the previous recommendation of sell April Futures and buy May Futures seems to have worked; the gap between the two has widened slightly. The May-June Futures also show a trend of backwardation and a similar spread of sell May Nifty and buy June Nifty may work.
MICRO TECHNICALS
Hughes Software
Current Price: Rs 198.05
Target Price: Rs 207
The stock made a strong recovery on Friday after dropping to Rs168. It is trading inside a range of roughly Rs 165-215 and unlike other tech stocks, the support didn't break on Thursday. The stock will probably travel towards the top of that range and meet selling pressure around Rs 205-207. Go long and keep a stop at Rs 189.
Infosys
Current Price: Rs 2617
Target Price: Rs 3100
The stock has retraced from Rs 4150 to a low of Rs 2420. It is likely to see a technical bounce between 30-50 per cent of that fall. This may be a very short-lived movement since the stock is liable to drop again to at least the Rs 2400 and possibly lower to around Rs 2200. There are several ways to try and exploit this swing. Go long with the Future of the share. Alternatively wait for the stock to dip to Rs 2450 again and then go long. Keep a stop at Rs 2450.
Satyam
Current Price: Rs 144
Target Price: Rs 128
The stock is likely to test support at Rs 128 again. Any upward move looks likely only after Rs 127 level is tested a second time. There is a fair chance the stock will fall below Rs 127 to find secondary support between Rs 110-117. Long-term investors should wait for that fall before going bargain-hunting.
Mastek
Current Price: Rs 304
Target Price: Rs 340
The stock dropped from Rs 560 on Wednesday to a low of Rs 260 on Friday before staging a late recovery. It registered enormous volumes during this fall. The technical recovery that started on Friday afternoon could continue till the Rs 340 levels. There is meaningful resistance only around that level. With luck, a rise till the Rs 360 is also possible. Stops are meaningless with such a volatile share, but exit if the stock falls below Rs 260.
Wipro
Current Price: Rs 929
Target Price: Rs 820
The stock is likely to find reliable support only around Rs 815-830 levels, close to its September 2001 lows. It is advisable to avoid the stock until it reaches those levels. If the 900 Put is available at below 50, it may be worth buying. The May Future may be worth buying at Rs 943 since this inherently low volume stock will stage a strong recovery till around the Rs 1150 levels once the trend turns.
(The target price and projected movements given above are in terms of the next five trading sessions unless otherwise stated)
