Elections done with, Budget on the horizon

The UP election results have come and gone. What do they portend in the future for the markets. For the week, the markets were down 0.5 % which hardly tells the story.

1. The results clearly show that the Congress position is weakened. Punjab, they were expected to win and UP to do much better. The government will not be in immediate danger for the simple reason Mayawati needs support from the Centre. Her band of 21 MPs are there.

2. The problems arises when both Trinamool Congress and Samajwadi Party play hardball. Both would love an early election to cash in on the popularity wave.By 2014, both stand to lose a lot. This also means Petrol price hike and other reforms take a back seat.

3. What does this bring for the budget. The budget can be very aggressive or a populist one. A populist one if the government feels it may not get a chance to present another budget and an aggressive one if the government feels it can last the full term till 2014.

4. The arithmetic favors the government. It has 206 MPs, NCP 9, DMK 18, NC 3 bringing a total 236. Add to this Mayawati's 21 taking it to 257 just 15 short of a majority. Add Ajit Singh's 5 and Laloo's 4 to it, we come to 266 just 6 short of the majority mark. What will happen is the government's decision making capability will be limited. The government will continue to muddle through.

5. The up move from 4532 to 5630 is about 1198 points. This marks A leg of up move.B leg down will correct this entire up move. B-a was 5630-5171 = 459 points. Expect B-b upwards anywhere between 5400-5540 followed by b-c till 4950-5100.

6. The above count will get negated if the markets go above 5540 and then we will have finished the down move and next leg up till 5750-6000.

7. The next leg of the up move will have the mid caps rallying. This rally has been on the back of FII inflows. From December till ow the government has not done anything on the reform front. Post a lackadaisical budget, the markets may correct as a knee jerk but that will present a buying opportunity.

8. Our strategy should be that if we near the 5500 mark before the budget, move at least 50% in cash and wait for the budget outcome. Re-enter only above 5600 or on sharp dips.
The fact that the CRR rate has already been cut, takes away 1 more reason for the markets to rally after the budget. I expect a rally to 5450-5500 immediately.
My strategy has been trading in the mid caps and large caps, I and Lakshmi picked out. I believe that the current is a bear market rally till 6000 and we should still test 3800-4200 before we end this bear market some time in 2013. I trade i stocks and bring their cost price to about 5 % dividend yield. I leave these stocks for the long term and will be happy with the dividend income from them. If I am wrong and a new bull market has started, these same stocks will give me the required returns.