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Vacation Time! You know global markets are getting increasingly correlated when analysts in India start reasoning that the the Christmas and year-end holidays (the usual culprits for lethargic Western markets, this time of year) were responsible for the dull drift downwards that happened this week.

After starting off the week with a bang, the major indices sobered up as the Thai market fiasco spilled over into Indian markets and harsh memories of 1997 unnerved FII (Foreign Institutional Investors) players. Even though the Thai government, in all its wisdom, reversed some of its directives, the last thing that fund managers wanted on their watch was another Asian contagion circus.

Even as the experts in the media stressed that this time it was different, the FIIs decided to err on the side of caution and sold heavily during the week, about Rs 10 billion worth.The domestic mutual funds bought into this selling, but it was not enough to stem the outflow. After all, which fund manager wants to see his fund's performance take a knock in the last week of the year and diminish the holiday cheer and the fat bonus paycheck?

IPOs were the flavor of the week, with the initial listing of Sobha Developers at Rs 1111.25, a premium of 73.63 % over its issue price of Rs 640. The strong showing attracted more investor interest to the realty sector as stocks in the sector such as India Bulls which, up 18 % from its low last week, rose on a valuation report that showed its projects in development valued at Rs 21,569 crores [US $ 4.9 Billion]. While preaching caution at the landbank valuation guidelines being used for real estate plays, fund managers cannot afford to ignore rosy projections of a huge supply deficit being projected for their end product-residential and office space. More market attention got focused on the sector with the respected Mr. Soros talking about his investments in the infrastructure and realty sector and his comment that he might be interested in picking up more exposure in these areas.

An otherwise lackluster market produced a few bright spots in the cement, pharma and auto sectors. The realty rub-off on cement stocks led them to display a firm trend towards the close of the week with India Cements at Rs 232, up 25% from its low last week. Pharma counters also showed some strength with Ranbaxy [trades as a GDR] being bid up on news that its Simvastatin [therapeutically equal to Merck's (NYSE:MRK) Zocor] drug was approved by the US FDA for marketing in a larger variety of dosage offerings. Dr. Reddy's Laboratories Limited (NYSE:RDY) also moved up quietly, closing at Rs 804.20 up 5.80 % from last week.

ONGC was up 9.75 % from its lows last week due to the announcement of new oil and gas finds, which could add to earnings in the coming quarters. ONGC played a huge role in keeping the indices positive in the middle of the week due to its weight-age in indice composition. Other strong counter trend movers were Mahindra & Mahindra and Tata Steel [also trade as GDRs].

BSE Sensex 1-yr chart - click to enlarge:

bse sensex

The notable developments of concern were the continued weakness in the banking sector caused by the CRR hike shock and a rebound in the inflation rate to 5.38 %,with the Bankex index down 2.4 % for the week. Equally weak was the BSE IT index,trading down 2.4% for the week. These are worrying signs for the market's strength as a whole, as these two sectors had largely led the rebound from the May 2006 lows and are now exhibiting signs of buyer fatigue.

So, where does the promise lie for this week's trading?

Nifty Index futures for the near month and next were trading at a discount to the Index's current price indicating less optimism going forward on the part of buyers. Futures expiration in the coming week are not going to aid in lowering volatility either. As global indicators go, traders I spoke to are keenly watching the continued weakness and divergence in the Dow Transportation Average, when compared to the Dow Industrials, and are gingerly unloading positions on rallies, paying respect to the Indian market's tendency to correlate with the US markets (albeit with a time lag).

On the brighter side, expect some follow-through buying in the auto sector and on market dips in the realty sector as long term investors continue to flock to the India story in terms of infrastructure buildout and housing for the upcoming middle class. The profusion of funds being raised for this purpose bears testimony to this fact. I expect the pharma sector's recent strength to lend a helping hand going forward in times of market weakness. Amongst other ideas, Jet Airways could be a surprise mover if oil prices start to come down. And let us not forget that earnings season is almost upon us and a good set of earnings could be the kicker in the pants the markets need going forward.

Happy holidays and have a good trading week!

Disclosure: Author hold positions in the above mentioned stocks on behalf of his clients in their investment portfolios.

Source: Indian Market Report: Dr. Reddy's Moving Up Quietly