Weekly Stock Market Forecast - 21st to 25th July.

The week gone by began on a subdued note and the indices continued to extend their losses, hitting a new 15 month low during on account of heavy selling across sectors. This unabated selling intensified as Fitch Ratings revised the outlook on India’s long-term local currency Issuer Default Rating (IDR) to Negative from Stable, against the backdrop of expected worsening in the fiscal position of the government in FY09. To put things in perspective, according to EPFR data, India-dedicated funds witnessed an outflow of USD 944 million in the month till 9 July 2008 which ranks amongst the highest redemptions faced by any country-specific funds.

However, later in the week, thanks to the steep correction in crude oil prices which fell close to USD 16 per barrel in three trading sessions and lower than expected inflation numbers at 11.91%, market sentiments were further boosted. Resultantly, the markets recouped all its losses of the week and the Sensex rallied over 1,000 points in the last two trading sessions, registering one its fastest up-move in recent times.

The global markets too registerd impressive gains with the Dow Jones Industrial Average gaining over 3.5% during the week followed by Nasdaq and S&P 500, each gaining 1.95% and 1.7% for the week.

Though a big positive for the market this week was the first sign of oil prices cooling off, the Federal Reserve had already cautioned against growth and inflation risks which are straining the US economy. The same was also reflected in the lower than anticipated volume growth in the quarterly numbers announced by the Indian IT companies.

Adding to the apprehension, the recent downgrade in the ratings is expected to put additional pressure on the rupee which has depreciated by over 10% since the first week of May 2008. Political uncertainty too looms largely as the Government prepares itself to prove its majority in Parliament early next week.

Thus for the week forward, the markets are expected to trend sharply on either side till the confidence vote is out of the way on Tuesday. Thereafter, the focus will shift back to oil and if it cools off, a rally could be in the offing. However, considering the recent crisis unfolding in the US financial sector, additional write-offs going forward by these companies need to be closely monitored. Furthermore, it would be prudent to remember the oil price scenario, which could change overnight with even one untoward statement by the leadership of the US, Israel or Iran.

Investors would thus be better off exercising some caution and taking partial profits during up-moves and waiting for some of the immediate uncertainties to settle, before taking a call on the market .