A move past 4,900 for the Sensex and 1,540 for the Nifty would establish an intermediate (medium-term) uptrend. The Sensex would then have to close above 5,164 and the Nifty 1,626 for a bull market. The BSE-500 should confirm the move by crossing 2,088, as that would mean that the mid-caps are in it, too.
A bull market will become a greater possibility if an intermediate uptrend is confirmed now. This is because the indices would then have a higher intermediate bottom than the preceding ones at the May 17 (post-election crash) lows of 4,227 (Sensex) and 1,292 (Nifty).
The market had rallied promisingly until Monday (June 28), but the moves on Tuesday (June 29) and Wednesday (June 30) suggest that investors are not willing to take too many chances until they see the Budget.
As far as leading index stocks are concerned, a move past 470 would take Reliance into a long-term uptrend. ONGC - 750, ICICI Bank - 275 and HPCL - 360 are the corresponding bull market (long-term trigger levels) for the heavyweights. Infosys is already in a long-term uptrend and would have to fall below 4,980 to reverse into a downtrend.
Stay invested but don't trade on Budget day
This is going to be the first Budget of the new government. The past record of the current team of Dr Manmohan Singh and P Chidambaram has been very good.
They understand that good economics is good politics. I expect the Budget to be a good one for the capital markets. One of the things that will ensure that the Budget is not adverse to the markets is the FII inflows, which have been very strong, this past year.
Now if the Budget is not upto the expectations of the market, then the amount of money that will flow out of the Indian markets will be enormous. People are holding on to their investments because the valuations are attractive.
My advice will be to keep away from trading on the Budget day. Don't do anything on that day. During the Budget speech, all the good news comes first and then the bad news follows. The trading session after the Budget will be crucial.
But even more crucial will be the coming Monday (July 12), because the fine print will be analysed by everyone during the weekend before they make their calls on Monday. But we have a saying, which goes "Budget or no Budget, winners keep on winning." My point is that no one can afford to make their investments zero before the Budget.
Investments are always there. But there should be no trading positions. I see no point in trading based on expectations of the Budget. Budget may turn out to be good or bad. The prudent thing will be to discount that risk completely in your investment plan, which should be based on long-term fundamentals. Basically valuations look attractive. One should stick to the good stocks.
Hotels, capital goods, engineering and tractors are the sectors, which are definitely going to do well, irrespective of the Budget proposals. The policy risk is very low in these sectors.
On the contrary, one would have to wait and watch on the oil & gas sector where policy decisions will make an impact. Valuations are very attractive in that sector.
If the right direction is set for oil companies, then scrips like HPCL and BPCL have the potential to be multi baggers. But that will be dependant on the Budget proposals. SBI, Asian Hotels, Thermax, Cummins, Mahindra & Mahindra will be my top picks.
If the Budget turns out to be a bad one, then one can also look at IT, MNC pharma (Indian pharma scrips are quite over valued) and even banks. I think the monsoon will be a far bigger trigger for the markets than the Budget.
Budget is more like a side show. Even if the Budget is good and monsoon turns out to be bad, markets are in for trouble. Having said that, fundamentally the long-term outlook is strong. It is very difficult to lose money at the current market P/E.
Long-term story is intact
It all depends on whether you are a short-term player or you are in the markets for the long-term. If you are a short-term player, then you should look at what levels the markets are on the Budget day before formulating strategy.
If the sentiment is high and there is a general euphoria in the markets, then may be it is time to reduce your exposure.
On the contrary, if pessimism sets in and the markets are on a downward curve, one can think of increasing exposure. The premise is that the long-term fundamentals still look good and the markets are likely to move up sooner or later.
Budget is more of a government balance sheet statement than a policy statement. Experience is that whenever a government has come out with far reaching policy announcements, invariably they have failed to put words into practice, thus leading to overall disappointment.
So it is always better to invest with a long-term perspective rather than hankering for short-term gains. If your are short-term player you will have to take into account various favours like technical indicators, forward positions and speculative positions.
If the markets are in an overbought position then there is bound to be downside and vice versa.
As far as sectors are concerned, cement, IT and pharma are the prominent ones, which are more-or-less insulated from government policy. However, sectors like fertilisers and banking are more dependent on government policy and are therefore more likely to be volatile.
In short, the long-term story is still intact and the markets should move up post-Budget. Indications are that we are in for a good monsoon this year and this combined with the interest rate scenario and India's continuing success in out sourcing should ensure good times ahead. We have scaled down our FY05 Sensex estimates from 6,800 to 6,200.