Market polarization underway tread with caution!

Indian markets experienced a tug of war between bulls and bears this week with benchmark indices largely swaying sideways while investors continued to remain guarded. This cautiousness isn’t distinctly visible especially in the Nifty50 index which has turned so polarized that only a handful of stocks are participating in a concentrated manner in the rally. It is seen that the largest 10 stocks in Nifty 200 outperformed the other 190 stocks by 7-8% this month. But while the larger stocks are still in an upward momentum, the broader indices have been experiencing a correction. The number of stocks that were trading above their 50 DMA dwindled from close to 100% in June to just about 45% now. The cautiousness seen in secondary markets seeped into primary markets which resulted in a series of tepid listings after a stupendous IPO season. But a shakeout in small and midcap stocks since the beginning of August has led to some cleansing of the froth which finally aided to keep the market buoyancy intact this week.

The question doing rounds since the past couple of weeks is ‘Are markets at the top of their cycle?’ But the fact that people have turned weary and broader indices have reacted accordingly itself implies that there are no indications of a top as of now. Historically, tops are formed around extreme market exuberance, but that excitement has fizzled out in the past few weeks. Hence, top would be a very strong word to use at this point in time as the rally isn’t over yet although corrections on the way up can never be ruled out. What we witnessed was not the ‘beginning of a crash’ but a ‘healthy correction in a bigger bull market’. Thus, this is an opportunistic time for investors to buy quality stocks on dips and given that the market is creating new highs every week, this is definitely not the last of greens that we expect to see.

Event of the week

The FM unveiled a massive Rs. 6 lakh crores National Monetization Pipeline that will look to unlock value in brownfield projects for infrastructure creation across the country. While this plan is beneficial for the entire economy’s progress and looks promising on paper, but it could be riddled with speed breakers such as lack of revenue streams from certain assets, regulatory & taxation concerns and lackluster bids for PPP initiatives which hint at resistance among private investors. Thus, the true impact of this plan would be visible only when some material steps are taken towards implementation which would require significant preparation on the ground and administrative readiness. Investors should not jump into the bandwagon immediately.

Technical Outlook

Nifty50 closed on a positive note for the week but continued to trade within the previous week's candle range. On the daily time frame, it has been making a series of spinning top and hanging man candlestick patterns which are signs of indecisiveness. A mild dip towards short-term averages can be expected but the major bullish trend will be intact as long as Nifty trades above 16,250 levels. Any break below 16,360 support levels will signal weakness in the short term.

Nifty50 Update 20 August 2021

Expectations for the week

Indian bourses are expected to face whipsaws post Fed’s Jackson Hole meeting outcome. Participants are eager to understand the timelines for gradual tapering of bond purchases to judge the mood on the Street. Also, markets could be influenced by an eventful economic calendar starting with quarterly GDP growth rate numbers followed by auto sales numbers and manufacturing PMI figures in the coming week. Investors may witness profit booking in some overvalued stocks however investing in high quality stocks in a phased manner would be a good approach. Nifty50 closed the week at 16,705.20, up by 1.55%.


Are markets forgetting the third wave?

Indian markets had been on a ‘Make and break’ new lifetime highs trend since the past couple of days after mirroring global market indices in their move to the top. But mid-week, developed countries showed signs of sluggishness especially after Fed minutes confirmed likely tapering, the July retail sales data in the USA was below expectation and China reported sub-level growth rates for the month of July. Usually, India dances to their tunes but it maintained a relatively stable stance mid-week as the worst hit industries witnessed recovery in July amidst the pandemic. July retail sales came in at 72% of the pre-pandemic levels, 61% more passengers took to the skies compared to June and the hospitality industry also witnessed increased occupancy. Even Nomura’s India business resumption index crossed the 100 mark for the first time after dipping in March 2020 and settled at 101.2 levels. With recovery brewing from the highest impacted sectors, what remains to be seen is if India continues to maintain this current level of commercial momentum to further drive this rally.

The resurgence of COVID-19 variant especially in China and USA point to one question - have Indian investors turned a deaf ear to the probable impact of a third wave? With every 52-week high we make and new daily rise in cases across the globe, the above question spirals deeper and deeper. Investors must not forget that while markets tend to move upwards, only one negative news will cause a correction with twice the intensity, losing investor’s capital in a jiffy. Do not underestimate markets and keepin mind that there are risks of a third wave. Although the pace of industry recovery and vaccination is rising, but the ultimate dictator would be the INTENSITY of the THIRD WAVE and how investors react to it when and if it happens.

Event of the week

Crude oil surged 48% in the first half of the year but there is a 11% correction in brent's price since the start of August. The main reason being arampant spread of the Delta variant worldwide causing mobility restrictions and affecting demand, amidst an increase in output of 4,00,000 barrels a day by the OPEC+ starting August. Crude oil futures on MCX saw a dip too as traders trimmed their position amid a weak spot demand. Unless there appears a secularsign of economies moving back to normal, crude prices are likely to be under pressure.

Technical Outlook

Nifty 50 index closed mildly negative for the week and formed a shooting star candlestick pattern which is a bearish sign. While Nifty has been outperforming major developed and emerging market indices, a shooting star candle hints at a mild retracement towards the short-term averages. There could be a dip to 16,150. We suggest traders maintain caution going forward and remain watchful of how the index reacts to the 16,150 zone, as any break below the same might lead to weakness in the short term.

Nifty50 Update 20 August 2021

Expectations for the week

Considering a slew of positive July recovery indicators, markets are expected to remain buoyant in the coming week. Further, investors can refer to the monthly expiry's rollover data to gauge the confidence in momentum and assess whether they will continue their march to fresh highs in September. Moreover, the GDP data for USA is also expected which could influence market sentiment globally. Investors are advised to pick only fundamentally resilient stocks. Nifty50 closed the week at 16,450.50, down by 0.48%.


Have the Tables Turned for Mid and Small Caps?

Indian benchmark indices have majorly portrayed a unified stance in the past year with their upward trending momentum, despite all odds of a lockdown or economic pain or inflation levels cornering the upper band of the range. Be it Nifty50 or Nifty mid cap or small cap indices, all indices have shown grit and determination to continue their bull rally. But at the start of this week investors observed some form of fragmentation and markets began doubting the continuation of the rally. While Nifty50 contin-ued its onward march to fresh highs, small and mid caps showed signs of cracks. It is the first time in several months the broader indices underperformed the benchmark in a rapid selloff that ensued after additional surveillance measures were announced by BSE. But could a circular like this cause a “deep correction” on Dalal Street? While it did act as a catalyst, this is not the end of story for the broader indices. Infact, as per July mutual funds data there has been a positive bias towards small-cap funds with a 152% MoM jump in inflows as against only a marginal rise of 8% MoM in large-cap funds which shows that there are still bundles of cash being diverted towards the smaller cap stocks. Hence, the confidence seems to be intact from this segment of the market.

While DIIs are focusing on broader bourses, FPIs have begun pumping money in large caps showing renewed interest after a 4-month hiatus. Penny stocks have also been in favor as retail investors now own around 70% of its free float as per Bloomberg Intelligence while promoters orchestrated a stock sale aggregating to over Rs. 20,000 Crs. The selective approach of various categories of investors to different segments of our market has indeed been a boon, as majority stocks big or small are delivering returns for shareholders across the board. But typically, such a momentum driven surge is a signal to exercise caution as valuations move ahead of their fundamentals. At this point, any news flow could have triggered the selloff and hence the friction in mid and small caps mid-week. However, this was just a pause and the rally should continue for some more time.

Event of the week

July witnessed a spike of 16.42% YoY in number of policies sold within the life insurance space while the premium collections declined by 11.1% in the new business premiums during the same period. Further, life insurance players took a massive hit on their bottom-line when the number of claims surged to 3-4x during the second COVID-19 wave. But this doesn’t spark grave concerns given that the pandemic has significantly transformed this industry into a pull product rather than a push product. People resorted to purchasing additional policies on back of heightened awareness of life insurance being a necessity. And given that our insurance premiums as a proportion of GDP vs. developed nations is still low, India offers a long runway. Therefore, potential in life insurance remains huge, and with the traction it has achieved in recent times, trends are likely to improve going forward once the situation normalises.

Technical Outlook

Nifty 50 index tasted a new milestone of 16500 this week which is a follow-up buying move, after a consolidation breakout at 15950 resistance. Markets in general are trading bullish, in sync with other major global indices. There is good upside potential as long as 16200 levels are not broken, which is an immediate support on declines. Traders are advised to maintain a bullish outlook going ahead.

Nifty50 Update 13 August 2021

Expectations for the week

Majority of India Inc.’s first quarter results have been stronger than anticipated and in the absence of any big event, global cues are expected to drive the market direction. Though WPI numbers would be announced in the coming week, markets are expected to take them with a pinch of salt. Investors are advised to keep a safe distance from securities where valuations seem unreasonable, instead they should ride the bull wave only on fundamentally sound firms. Nifty50 closed the week at 16,529.10, up by 1.79%.


Is Nifty expensive at 16000 levels?

Indian markets marched to new lifetime highs and equity markets worldwide remained buoyant which further bolstered confidence for our indices to continue upwards, after a time correction of nearly two months. With the benchmark index crossing the 16,000-mark this week, the question still remains "What next?" Now Nifty50's average PE has been around 22.39x and it hit a historic high of 42x around February 2021 when markets tried crossing the 15,000 level for the first time. From March to now, the PE has infact tapered down to 27 times and the current valuation is hovering near the upper band of pre-covid levels of 2020. What is amusing is Nifty's PE toggled in the band of 24-29 times band for almost 3 years from May 2017 to March 2020, which is again a range Nifty hadn't explored atleast since 2006. What this means is that although the levels are elevated but Nifty can remain in this range for some time as it has very well done in the past.

But this sudden drop from 42x to 27x is courtesy of 2 reasons - From March 31, there has been a change in methodology in Nifty 50 for calculating PE by using consolidated earnings of companies rather than standalone financials. This indeed cause a massive jump overnight but there was something else which, to an extent, normalises this drop - EPS GROWTH! Nifty has managed to deliver decade high earnings growth in FY21 thanks to the infrastructure boom, liquidity inflows, tech driven efficiency in supply chain that has aided the rally and going forward too given the kind of deleveraging we are witnessing and the cash that companies are holding on to, there will be capex and reinvestments which can unfold a couple of years down the road driving earnings growth through future themes like ethanol blending, green energy, EV and the likes. So although, optically, benchmark's current PE might look expensive but once the earnings grow further, there will be some rerating in valuation. Investors must therefore not wait for a correction and instead focus their energies on researching the wealth compounders of tomorrow and invest in them in every dip.

As Peter Lynch says: "More people have lost money waiting for corrections and anticipating corrections than in the actual corrections."

Event of the week

Amid fears of the third COVID-19 wave and existing uncertainty in the domestic economic landscape, RBI maintained its accommodative stance. Despite concerns about inflation, the repo rate at 4% and reverse repo rate at 3.5% persist at historical lows to pump adequate liquidity in order to bolster economic revival. While this policy support is the need of the hour, it cannot continue forever. If things don't go as planned, RBI may initiate policy normalization starting with a gradual drainage of liquidity followed by marginal hikes in the reverse repo and repo rates, but that doesn’t seem atleast for a couple of months. Nevertheless, with the current policy acting as a crutch, markets are expected to stand strong with renewed confidence.

Technical Outlook

Nifty50 index crossed lifetime highs and closed the week on a positive note one notch above its consolidation zone. The overall outlook has turned bullish for the time being since it has taken a decisive direction on the upside after sideways consolidation. If all goes as planned, Nifty might be headed towards levels of 16500 with no immediate resistance at higher levels and bulls all charged up crushing the call sellers. In the event of a corrective dip, its immediate support now lies at 16,150.

Nifty50 Update 06 August 2021

Expectations for the week

Although market sentiment is expected to remain buoyant, all eyes will be on economic data that will be disclosed mid next week. Data on important economic indicators ranging from India Industrial numbers to inflation rate and manufacturing production will keep markets on their feet. It is likely that some of these expectations would be factored in, but any miss on this front could cut short this rally in the short term. In a bull market like this, investors are advised to seek out fundamentally resilient stocks and resist the urge to invest in fancy fast moving stocks. Nifty50 closed the week at 16,238.20, up by 3.01%.