Liquidity to script new highs for equities; bull run still a mirage
Markets across the globe have rallied since January 2012 after a disastrous showing in 2011, thanks to the wave of funds unleashed by the monetary authorities in US and Europe.

Indian equity benchmarks have fared much better than expected in 2012, with a good chunk of the gains coming in spurts, first in January and later from September when the government announced some policy reforms to revive growth and avert a downgrade of Indiaā?Ts credit rating. The Sensex has climbed 26% this year, poised for its biggest annual advance since 2009 as overseas investors have poured in a net US$23 billion this year.

A tentatively improving global economic scenario and the sentimental boost post policy action by the government on the much-awaited reforms should foster gains for stock markets going into next year as well. As the markets are gearing up to usher in the new year with renewed zeal and optimism, we take a closer look at the long term price structures to chart the course of Indian equities, going ahead.

Our long term analysis is guided by the eight year cycle phenomenon followed by the Sensex since its inception (explained in detail on page 7). The index behaviour post the 2008 top appears to be precisely replicating the entire movement post the 1992 top. A striking similarity between these two major peaks falling within the eight year cycle tops is that both were preceded by a multi-fold rally.

Based on various technical arguments appended in this report, we expect the Sensex/Nifty to head towards 21000-21500/6300-6460. However, sustainability at these levels is questionable; therefore we recommend that investors consider booking profits at such highs.

The next down leg to unfold from thereon could lead indices towards 17500-16800/5250-5050 levels in the later part of 2013/early 2014. However, we believe that such a correction would offer a golden opportunity for long term investors as the next bull run may lead the indices towards new highs by 2015-16.

Our preferred picks for 2013 are: Punjab National Bank, Ashok Leyland, NMDC, Bhel, Nestle India, Cipla among large caps and JK Tyre, Tata Global, Pidilite Industries, Aditya Birla Nuvo, TV Today, Sun TV and Mangalam Cement among midcaps (Refer page 11 for details)
  • The index approaching the 2008 or 2010 highs or even surpassing the same by a small margin (2%) in the near future must not be construed as the start of a new bull run based on the observation of market behaviour of re-test and react post the 1992 peak
  • The current up move from December 2011 lows, which is 12 months old, is seen approaching maturity as all directional legs since 2008 have lasted around 13 to 15 months. Based on this attribute, the current rally is expected to conclude towards the first quarter of 2013
  • A weakening Indian rupee against the greenback to the extent of 56-57 levels would further instigate a downslide in equities