Index Outlook: A Happy Diwali for Indian investors…

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Dalal Street has much to feel pleased about this Diwali. The Sensex and the Nifty have moved up around 23 per cent in the last 12 months and many smaller stocks have given multi-fold returns.

But don’t expect too many fireworks in the Muhurat session this year. With the indices perched close to their lifetime peaks and threatening to slide further, investors are likely to be circumspect.

The action this week is likely to be muted with indices moving in a small range as the market is open on only three full sessions. Many might want to cut back their trading activity to spend time with their family.

Concerns on the ability of the Euro Zone to ward off a recession caused deep cuts in European and US stocks. While stocks did recover some ground towards the end of the week, the complacency of investors in the developed markets appears to be shaken.

This is reflected in the CBOE volatility index hitting the high of 31 during the week. This level was last visited in December 2011. The VIX that is calculated based on the premium of S&P 500 options, shows the level of fear among the traders.

That this index did not cross 23 since January 2013 implies that the level of investor confidence has been high since the beginning of last calendar year. The CNN fear and greed index is also tilting towards extreme fear reflecting this change in the sentiment.

The Sensex too sold off to dip below 26,000 on Thursday. But improvement in global sentiment and hopes of a strong showing by the ruling party in the assembly polls helped the index rally.

There are other factors playing in favour of Indian stocks. Fall in crude prices will help the country’s current account deficit that is again beginning to bloat with growing gold imports.

Nymex crude futures dipped below $80 last week. But there is strong support in the zone between $75 and $80 for crude. It is quite likely that the crude futures halt their decline in this region.

If this level is breached, next support is around $65. Since many are of the opinion that oil producers will find it unviable to produce below $80, we should be able to find the floor of oil prices soon.

FPIs were net sellers through last week. Their net sales for October stand at $613 million. Sharp spike in derivative volumes on the NSE too implies that traders were quite active in the previous week.

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