Overseas markets, the status of rainfall across the country and June quarter earnings of companies may dictate the trend in equities here this week.

While the corporate results are less of a concern for the market, the signs of weakness in US markets and scanty monsoon are worrying investors. A couple of reputed market operators are said to have built sizeable short positions in the last hour of trading on Friday, which caused the abrupt fall in key indices that day.

Realty, metal and banking continue to be the weak spots, while fast-moving consumer goods and auto shares are expected to continue their outperformance, as investors are pinning hopes on a consumption-led recovery. The mood in world markets is expected to remain jittery on conflicting signals from various economies.

Back home, though industrial output in May grew faster-than-expected at 2.7%, sparking hopes that economic recovery is on the way, the market appeared in no mood to cheer the news, as foreign investors were unforgiving about the absence of key policy announcements in the Union Budget on July 6. Last week, benchmark indices shed close to 10%, with foreign institutions selling Indian shares worth Rs 4,680 crore in the period, according to NSE data. From March 13 to July 7, these investors poured in Rs 35,000 crore.

Brokers said foreign institutions have build-up short positions in Nifty futures after a disappointing Budget for the market, indicating that they expect the market to slip further. They fear that if the monsoon fails this year, Indias revival, which is projected to be as early as the fourth quarter, could be in jeopardy. The monsoon deficiency in the northwest of India, including Punjab, Haryana, key areas of the countrys agricultural production, and Uttar Pradesh, has risen to over 50% till last week. Prices of various pulses have shot up in recent days, triggering concerns about a rise in inflation, though not immediately, and hardening up of interest rates.

We expect a rapid transformation from deflation to inflation during the second half of this year, as the impact of strong rises in commodity prices are felt, said Robert Prior-Wandesforde, senior economist at HSBC. This, in turn, should lead RBI to start raising rates from the April-June quarter of next year, he said in a report.

The existing stock valuations are also a concern, though such anxiety has receded a bit after the recent correction. Andrew Holland, CEO, equities at Ambit Capital feels the Sensex at 13000 or below would be a good time to buy. The valuations at those levels are not expensive if investors were to look at FY11 earnings, he said. On Friday, the Sensex closed at 13504.22.

Notable corporate earnings this week include HDFC Bank, Axis Bank, Bajaj Auto, Zee Entertainment and Tata Consultancy Services.