Index Outlook: Another Black October?

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Correction has commenced in the global markets. With indices perched at record highs, there is room for further downside
October — the most dreaded month in stock markets — is here. And so is the much-awaited correction.Stocks in most global markets moved lower last week, with indices in the US and Europe losing 2-5 per cent. Indian stocks too moved lower in tandem.

The reasons for the decline are not far to seek. The US Federal Reserve is all set to end its quantitative easing programme by the end of this month. That is going to suck out much of the liquidity that has fed the stock market rally since 2009. Yes, Japan and Europe are continuing their easy money policy but the absence of the US in this group will be felt.

The breathless rally in the US and other developed markets has resulted in stretched valuations. With interest rates in the US set to climb mid-2015, stocks are going to be impacted by the shift of money to US treasury securities. A slowdown in Europe and China and the continuing geo-political tensions are other worries that can weigh down stocks.

Back home, with the earning season set to start, investors cannot duck the fact that corporate earnings are not growing fast enough to justify the rally in their stock prices. Tension on the Indo-Pak border also put pressure on Indian stocks. The silver lining amid all this gloom is the fall in crude prices and the surprisingly good earnings of Infosys.

Both the Sensex and the Nifty closed below their 21-day moving averages last week. The indices moving below their recent low recorded on September 26 is a sign of weakness.
Oscillators in the daily chart are reflecting this weak trend. The moving average convergence divergence oscillator in the daily chart has moved into the negative zone. Other momentum indicators are also ruling in the oversold territory.

The medium-term trend is also beginning to crack. This is evident in the weekly momentum indicators giving a sell signal. However, these indicators have not yet moved into the bearish zone. That needs to happen to confirm the onset of a sustained medium-term downtrend.
The good news is that the monthly trend looks quite healthy in both the Sensex and the Nifty. There was a doji formation in September and a red candle so far in October. But there is no threat to the robust long-term outlook yet.

Global cues
It was a virtual rout in many global markets last week. Indices such as the CAC, Canada’s TSX Composite Index, DAX, FTSE and the Dow Jones Industrial Average took a deep cut last week. Investor fear peaked with the CBOE Volatility Index spiking to 22, the highest level hit since January 2013.

The Dow showed the first sign of weakness this calendar, dipping below the short-term support at 16,755. The next support for the index is at 16,300. Breach of this level can take the index towards 15,700. The zone between 17,000 and 17,500 is the key resistance zone for the index now. Amidst this bloodbath, most Asian indices including, PSE Composite, Shanghai Composite and Sri Lanka’s All Share Index, managed to stay resilient.

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