Pre-Budget Rally Kicks Off With A Bang

One of the few endearing moments was the Friday of last week when the bellwether shot up by 400 points as the Sensex broke out of sub-24,000 levels. This sets off a bullish tone for the coming week, and also a pre-budget rally that is so characteristic of the February months. In the past fifteen years, only six February months ended up in negative territory.

All in all, last week turned out to be much better as the major central banks of the world were accommodative and kept the strings loose on their monetary policies. Bank of Japan went a step further and set interest rate at a minus -0.1 percent. All this sets the bullish undertone of the market off to a firmer start - and the markets are looking optimistic for the next one-two weeks.

Looking back, foreign investors have been big sellers in January dumping stocks worth Rs 14,500 crore. Such a fierce selling has not been seen since the days of the liquidity crunch back in 2008.

But the good that has emerged out of all this is domestic investors have withstood the pressure and kept buying at lower levels. Domestic institutions bought stocks worth Rs 13,000 crore in January soaking up all the selling, while retail investors have been well-disciplined and spot on using the 'buy the dip' mantra.

Looking ahead, markets turned lighter due to the heavy selling in January and some of the froth and excessive speculation has been wound down. Punters seem to have reduced their short positions. Foreign investors turned buyers on the first day of the new derivative cycle pressing purchases worth more than Rs 600 crore.

At these levels, stocks are turning cheaper and fairly valued as they are quoting at near their historical averages.

Third quarter results have been mixed so far. Companies that consume raw materials such as iron ore, rubber, etc, are reporting better numbers, thanks to the falling commodity prices. Private banks' have been reporting better numbers than the PSU banks. Bad loan provisions have increased.

In the coming quarters, watch for lower provisions that can set the tone for a banking recovery. The banking sector has significant weights in the bellwether indices, which is why banking revival becomes crucial for a sustained market recovery. In the meantime, valuations of PSU banking stocks have dipped to rock-bottom levels, so further lower levels in this sector may not be in the offing.

There is caution still in the air. Global fears still persist. A Chinese devaluation or a rate hike by the US Fed cannot be completely ruled out in the coming months.

Foreign investors have to turn net buyers too, over the course of time for the recovery to sustain, which is not going to happen in a hurry unless oil prices recover rapidly from here. At 7800-7900 levels, we may also be running into a wall of resistances.

If this rally has to sustain beyond the budget month of February, the government will have to produce a good budget that not only checks fiscal profligacy but chalks out a growth path, boosting investments and providing relief to tax-payers which appears to be a tough act and the jury is out on that one.

Still, these are good times to pluck some low-hanging fruits which are the domestic-growth driven companies where commodity price falls have been reducing input costs. One could look at investing about 25 percent of their cash in the market now. Keep some buffer for future dip-buying moments, if oil prices or the global markets misbehave. For the moment though, it's good going.