The third quarter results season has started with a bang.
Infosys saw an amazing 17 per cent jump in share price on improved results and projections.
In sympathy, the rest of the information technology sector also shot up.
The CNXIT rose nine per cent in a single session.
Assuming the Infosys projections hold, and other IT majors deliver similar Q3 performances and forward advisories, the sector as a whole could see a positive re-rating after a long period in the doldrums.
The rest of the market, however, witnessed a correction in the last week after hitting a succession of 52-week highs in the new year.
The Nifty soared above 6,040 before it fell back to 5,950 on selling.
On Friday, the breadth was extremely negative with only 14 of the largest 100 stocks registering gains (seven of these gainers were IT majors).
The rupee hardened a little against the dollar and it looks set to gain against the yen.
The strong IT showing masked the impact of selling across the market on Friday.
The rest of the market seemed to be affected by some pessimism.
Part of this was normal profit-booking after a surge. But it was triggered by the release of the latest Index of Industrial Production numbers, which showed weakness in November.
The weak November performance was expected but the numbers may have been even lower than consensus estimates. December trade data also shows that export growth is still lagging.
So the current account deficit, which is already at record levels, is likely to bloat further.
Coupled to CAD, the fiscal deficit is also likely to be well over target in financial year 2012-13.
Notwithstanding accounting jugglery, the national accounts are in poor enough shape for Fitch's repeated warnings about a possible sovereign downgrade within 12-24 months to sound credible.
While the government is putting on a brave face about this possibility, it is actually an unpleasant prospect.
A downgrade would impede overseas inflows and that could set off a cascade of other adverse events.
The next two to three quarters will be touch-and-go with delicate, yet decisive fiscal management required.
Unless there is a significant improvement in the gross domestic product growth and a cutback in subsidies, the deficits cannot ease down.
Expecting prudent fiscal management in an election year flies in the face of history but the United Progressive Alliance government may not have much choice.
Of course, we'll only know what it intends to do when the Budget is released.
However, bad as the situation seems, it is also a 'known unknown'.
Finance Minister P Chidambaram may be right in that the market has already factored in some, though not all, of the worse case scenarios.
Certainly, foreign institutional investors have continued to be net positive on both Indian equity as well as debt, despite being well aware how fragile the national accounts are.
The silver lining in the weak IIP is that it should be an inducement for the Reserve Bank of India (RBI) to finally start cutting rates in its January 29 policy review.
The market is waiting for that, and rate cuts could give the stock market rally new legs, if domestic institutions switch out of debt into equity.
The government has also started to show a certain degree of urgency.
It seems serious in its intention to gradually raise prices of highly-subsidised fuels, such as diesel, gas, and even kerosene and fertilisers.
It has passed the banking Bill and lifted caps and restrictions on foreign direct investments into aviation, insurance, pensions and retail sectors.
Reportedly, the details of recasts of power sector losses are being thrashed out and a possible restructuring is also on the cards.
As of now, these are merely positive signals.
It will take a while before inflows actually occur on the ground.
Over the next few weeks, Q3 results and more importantly, forward projections will be released by most heavyweights.
This will be key to the short-term trend of the market and we could see the appearance of fragmentation, where share prices in different industry segments align in different directions.
Price volatility is likely to increase as specific companies and entire sectors are re-rated.
The market is poised at an interesting point technically.
As mentioned above, the breadth was very poor on Friday.
But the Nifty has found persistent support between 5,940-5,975.
If it manages to consolidate at these levels, the uptrend will resume.
In that case, it should by definition, beat 6,040 and it has a target of 6,150-odd.
However, if the market falls below say, 5,920, it could drop till the 5,820-5,850 zone and a pullback till 5,750 is not unlikely.
We may see a situation where a decisive breakout is followed immediately by a big move and trader have to contend with a movement anywhere between 5,750-6,150 inside the January settlement.
Settlement week is likely to be very tense. Apart from results, and so on, RBI credit policy release is on January 29 while the settlement is on January 31.
Those last three sessions promise to be interesting, at the very least.
Obviously, the high-beta Bank Nifty and the non-banking financial company sector are most sensitive to the RBI review and these stocks will probably have disproportionate impact on the market trend.
Trend following technical systems all suggest remaining long with a stop loss at, say 5,875-5,900, but a hedge with some sort of deep put could work very well if the market dives.
In the somewhat longer-term, traders and investors should make a watch list of closely held companies that must dilute holdings to comply with the Securities and Exchange Board of India's June deadline.
This guarantees a lot of primary market action in well-known, liquid, listed businesses.
So, buying on the secondary market, possibly subscribing to issues and also perhaps shorting stock futures in some instances, could all be on the cards.
Building a war chest to target specific companies on a case-by-case basis through the next few months makes a lot of sense.
The third quarter results season has started with a bang.