Mixed Signal
It is now clear that many factors are not being factored into the prices of shares and negative news is ignored by market players. For instances, burgeoning NPA for Public Sector banks in India after implementation of new mechanism, strong uptrend of Crude, food inflation in India, real estate inflation in China etc. Moreover, the current US growth is explained by re-leveraging of the public sector, which can not be continued for indefinite period. Once that reverses, household de-leveraging will pick up again. The European Zone is going through a sovereign and bank debt crisis. There is an overall increase in global uncertainly promoted by MENA turmoil, Japanese earthquake, EZ sovereign debt crisis and concerns on US fiscal sustainability that will affect negatively investors confidence and spending decisions of corporations and consumers in the coming days.
On the other hand, India witnessed in March, foreign institutional investor (FII) portfolio flows were a hefty $1.5 billion. Flows related to external commercial borrowings by companies were even larger in this period. There were some other lumpy inflows, too, related to foreign direct investments. Exports have been strong over the last few months. That is the reason, despite the sharp run-up in oil prices on the back of the crisis in West Asia and North Africa; the rupee remained remarkably stable and actually gained against the dollar which is again against the basic economic theory.
The current market is sending very mixed signals. The small caps are rallying to new highs. The two indexes remain below their prior highs despite the impressive bounce. So how do we interpret this conflicting information? The first thing to note is that the market remains vulnerable here, as it is overbought and the large caps remain near important resistance levels. It is very possible to see some near term weakness, and there is no shortage of potential catalysts to spark a pullback either. Oil continues to rally and the situation in the Middle East remains in flux. However, the recent price action, especially when coupled with the strength in the small caps revealed that there are still plenty of buyers behind this market. The probability that the March lows will hold as an important pivot low have risen exponentially due to the recent price action, and this still remains the line in the sand on intermediate and longer term charts for now. This is actually very valuable information provided by the markets and the markets appear poised for higher prices on the intermediate term as long as these lows hold. The true measure of this market's appetite will be tested soon as the markets have bounced into possible resistance areas relatively quickly. The markets did accomplish some good things in past weeks and the technical picture has changed substantially. The lows formed in March are now very key levels to watch. Due to the strength of this bounce, the markets should not even sniff these levels if this bounce will turn into a significant rally.