Markets on 24 Nov 10 - LIC Loan Scam Affects Markets

Markets had opened on a steady note and were trading in a tight range but in the late afternoon the LIC Housing corporate loan scam saw the market and especially the PSU banking stocks tank by more than 10-12%. LIC Housing was the worst hit because of its direct involvement saw the stock losing Rs.238 in a single trading session. It fell to Rs.1070 against its previous closing of Rs.1245. The other PSU banking stocks which were badly hit were Bank of India, Central Banl, PNB, Canara Bank and SBI. But we do not think that this negative event has the potential to derail the Indian Bull market story. There could be some more fall because of this event but quality stocks will attract investors and will even attract premium because of strong fundamentals and strong corporate governance.

 

The market breadth turned negative after the reports of loan scam, in contrast with a strong breadth earlier in the day. The BSE 30-share Sensex lost 231.99 points or 1.18%, off close to 375 points from the day's high and up close to 85 points from the day's low. Volatility was high as traders rolled over positions in the derivatives segment. We are of the opinion that markets will have a bearish bias in the next few trading sessions and hence all rallies should be sold into. The medium and long term structure of the India growth story and the bull market is intact but it is the short term which will give problems to the market. However, it will not be a situation where every stock irrespective of its fundamentals will be hammered like 2008 crash. This time select stocks which have strong fundamentals will be bought during panic situations. Moreover, the market too is not heavily overleveraged. So there will be a decline but it might get arrested around 5800 or at the worst 5750 levels. Strong resistance will be witnessed around 6000 levels. Hence for the next one month, market might trade between 5750 and 6050. It will be extremely choppy and volatile to say the least.

The strategy for the short term would be to trade only on an intraday basis with tight stop losses and invest only for long term. Positional trading should be avoided because of volatility and gapped openings.