Strong gains, on overseas cues

Market Watch

Short covering, derivatives rollover and a strong Wall Street should boost the Indian markets.

The week gone by was a test of nerves as the markets were gripped by volatile swings throughout the period before finally closing lower by 4.29 per cent.

The forthcoming week holds out the possibility of short covering ahead of the derivative settlement on Thursday. Most of the existing long positions might also be rolled over, since the selling induced by margin calls is behind us. The steep fall last week had compelled broking firms to square-off client positions, especially in the derivatives segment, due to insufficient margins. This should provide an upside to the indices.

The Indian markets are expected to have a gap-up opening on Monday following the strong US markets. Dow Jones was up 1.4 per cent on Friday ahead of the holiday season and optimism that the weak dollar will make exports attractive. The sub-prime losses haven't apparently dampened sentiments.

There has been sustained buying by domestic institutions, but the unwinding of participatory notes and carry trade by FIIs kept the markets rangebound, albeit with a negative bias.

On Thursday, the Nifty rebounded from 5400-5500 and Sensex bounced back from 18200-18300, which would now provide a strong support to the markets. There could be a downside in case the levels are broken. On the higher side, Nifty 5790 will be crucial. Higher levels will attract profit booking and this will keep the markets volatile. A close above the resistance level will signal a continuation of the bull run next month.

Reliance Industries and State Bank were star performers last week, pulling up the Sensex from lower levels. Stock specific activity is expected to continue in the forthcoming week.

Despite the correction, the value erosion in small and mid cap indices was lesser than the Sensex, due to the big gap in valuations. While the small cap index was down by only 2.02 per cent and the mid cap index declined by a mere 3.33 per cent, the Sensex ended the week lower by 4.29 per cent.

It was a good week for the primary markets, though. The IPOs had a good listing despite the FII-driven selling in the secondary market. Moreover, the new issues attracted a good response. This goes to show that valuations are only a concern for the secondary markets.