Sensex Conquers the Magical 20k mark – What Next?

Sensex… Sensex… Sensex !! It’s all about a playout between greed and the fear.

The Indian stock markets have ultimately got a breakout from its long consolidation range of last 15-month period – from BSE Sensex 14500 to 18500-point range. In fact, the benchmark index has witnessed a blow-out rally of 2000 points from the lows of 18000 in a short duration of last 15 sessions.

Moreover, today Sensex yesterday managed to notch a close above the magical 20,000-mark. Comparing today’s closing with the March 2009 lows of 8160 – the bellwether stock index has provided a whooping 145% gains in less then 2 years.

This is far higher than the returns provided by other leading emerging market equities such as Hang Seng’s over 90% and Bovespa’s little more than 80%, when compared over the same duration. Certainly, the investor sentiment is swaying to and from like a pendulum of a clock with emotions closely attached with market momentum.

The biggest out-performers among the Sensex constituents are Tata Motors, Hindalco Industries, Jindal Steel and Power and ICICI Bank with over 200% returns. While Telecom counters such as Bharti Airtel and Reliance Communications have remained laggards for almost whole of the market’s `V’-shaped recovery.

So, what next from here? Analysts have already started speaking about 23000 on Sensex until the end of the year. A point to be noted over here is that Sensex is already valued at an expensive 23-24 times earnings, but then the PE multiples could still surprise more on the upside during the most optimistic times.

There are 3 possibilities going forward..

1) More Upside

A possibility from here is that this rally might take a short break and again resume its upward journey; in line with the observations of the technicians that say that this blow-out rally may last a bit longer even from here. Chartists point out that if Sensex crosses 20500, it might get a leg-up to 23000 odd over the medium-term horizon.

2) Consolidation

The worst thing that an investor would like to hear is – markets drifting into ranged-bound movement. However, unlike investors, traders prefer consolidating markets as they get an opportunity to initiate short positions around a defined resistance zone and go long at the lower band of the consolidating range.

3) Small 5-10% Correction

Lastly, don’t rule out a knee-jerk correction on the downside, as markets are already in over-bought situation. On the downside, Sensex has a strong support at 18000-level (Nifty equivalent of 5350), below which there could be a strong intermediate downtrend.

My View

Currently, Nifty and Sensex’s 14-day Relative Strength Index (RSI) is perched above 80-mark, indicating an over-bought situation. For all those genuine investors out there, you need to maintain patience in such sentiment and liquidity-driven market conditions without being swayed by daily hullabaloo on Sensex making new 32-month highs.

Wise analysts are of the opinion that equity markets almost always provide at least 2-3 opportunities for the investors to register their entry in the fluctuating markets. I believe that the investor community is much more informed and educated now then ever before, after going through the pains and whip-saws of markets during the recent recession.

This post is more of a open question to readers rather than analysis – What do readers think? where do we go from here ?