Is Santa Claus coming to D-Street?

Markets this week seemed to be embracing the Christmas spirit as both the festive colours adorn trading terminals. After bleeding red on Monday, bourses lit up green recovering significantly from lows. This strong pullback might have hinted that the market is getting ready to launch itself into a phenomenon widely termed as ‘Santa Claus Rally’. This phase exhibits a stock market surge through the last five trading days of December and the first two days of January. In the past ten years, Nifty has borne witness to this peculiar surge 7 out of 10 times. Interestingly, the years with a Santa Claus Rally have been followed by a higher average yearly return of 15.32% against an average 12.52% returned by Non-Santa Claus Rally years.

While there are various pretexts and beliefs as to why markets react in this manner during this time period, the most popular belief is the lower participation by FIIs. As a matter of fact, FII activity in the Santa Claus Rally period has been observed to drop substantially as compared to the same 7 session time-frame of the previous month. For instance in the last 6 years, FII net trading activity in the equity space dropped by ~39% on an average during Santa Claus Rally years as against a relatively lower average of ~11% drop in other years. This lower contribution by FIIs puts domestic investors in charge, who tend to be bullish more often than not thereby propelling the market higher. Due to high frequency of its occurrence, investors tend to view this period as an ideal opportunity to undertake fresh investment activity, providing more grounds for bourses to advance. However, investors should keep in mind that currently the market sentiment is not overly optimistic and uncertainties continue to surround us. Market participants should therefore be cautious and watch if these green shoots culminate into a 'Santa Claus Rally' this year as well.

Event of the week

'IPOs galore!' was the prominent theme this time around with a slew of companies making their D-street debut every single day of the week. While all the IPOs received a great response with multi-fold subscription across the board, the euphoria surrounding the IPOs seemed to fizzle out as the sentiment of the broader markets turned sour. This in turn led to a series of tepid listings, despite healthy grey market premiums during subscription periods. Moreover, even the IPOs that listed at a premium saw their listing gains evaporate soon. This came in as a warning sign for those market participants who view IPOs as a quick money-making opportunity. Investors should therefore invest wisely in IPOs keeping fundamentals and relative valuation of companies at the forefront and not just the grey market premium.

Technical Outlook

Nifty50 index quickly bounced after testing the support of 16,400 but closed the week nearly unchanged. Nifty is also now trading within a downward sloping channel and continues to remain choppy. Bank Nifty index which was already reflecting weakness has broken the crucial support level and may retest the levels of 34,000. The overall undertone of the market has turned mildly bearish. Traders are advised to maintain a bearish bias as the upside is likely to remain capped at a resistance of 17,350. A decisive break above this level will negate this bearish outlook.

Nifty50 Update 24 December 2021

Expectations for the week

Volatility and whipsaw like movements will continue as markets react to Omicron related developments and the monthly expiry. The week may witness sectoral rotation with beaten down sectors picking up pace. The underlying tone of Realty and Auto is bullish, so a buy on dips strategy can be adopted. IT is showing strong momentum and is trading at all time highs backed by Accenture's splendid performance while banks continue to be vulnerable and are unlikely to witness major buying at least till the year end. Investors can further analyze the monthly expiry rollover data to take advantage of sectoral rotation and to determine whether the Santa Claus Rally will play out. Nifty50 closed the week at 17,003.75, up by 0.11%. Samco family wishes you all a Merry Christmas!

Samco family wishes you all a Merry Christmas!

Thank you,

Time to bank on banks?

As markets globally continued to navigate currents surrounding inflation, monetary policies and Omicron, the beacon of pessimism was passed on to the domestic bourses as well. FIIs have been withdrawing funds every single day this month. Except for September’21, FIIs have been net sellers since April’21. A major casualty of this selling spree has been Bank Nifty with majority of the top 10 constituents of the index experiencing a sequential drop in FII holdings for the September quarter. In fact, Bank Nifty has been a relative underperformer not only since the pandemic’s onset but even on YTD and 6 month period basis. History provides evidence that there is correlation between the sell-off by FIIs and Bank Nifty’s underperformance. Since 2017, if we look at those twelve months where FII outflows have been the highest, Bank Nifty has underperformed the benchmark index two-thirds of the time.

However fundamentally, the sector’s current positioning signals an optimistic long term outlook. In the quarter gone by, most of the bigger private banks either met or outperformed market expectations. Not only did banks witness improvement in asset quality owing to improved collections and contained restructurings, but they also managed to equip their balance sheet with adequate provisioning. On the lending front, loan growth has been resilient and is expected to pickup even further due to continued rise in housing demand, recovery in certain sectors like automobiles and a favorable economic environment. While bottomed out interest rates have augured well, even a rise in policy rates can expand NIM and therefore lead to higher earnings. What’s interesting is that the sector still trades at a reasonable valuation with more than 50% of Bank Nifty constituents trading below their 3 year average P/B multiple. This coupled with multiple tailwinds,leavesdecent headroom and value for the banking stocks to capture. Therefore, investors can accumulate stocks of fundamentally sound banks to capitalize on this long term opportunity.

Event of the week

The Fed, in an effort to ratchet up its measures against almost a 4 decadal high inflation, signaled that its run of easy policy is coming to an end. The acceleration of tapering by $30 billion per month as announcedwill conclude the pandemic driven bond purchasing in March 2022, opening the door for policymakers to hike the fed funds rate. Fed officials project three rate rises in 2022, two the following year and two more in 2024. The well telegraphed interest rate hike trajectory along with the lesser than expected hawkish policy provided much needed respite and helped US markets rally. Back home as no future guidance was received from our central bank, Nifty also ended its 4-day losing stint and ended in green temporarily riding on Fed’s announcement.

Technical Outlook

Bank Nifty index closed the week on a negative note, facing resistance around 37,300 levels post a brief bounce. While there is no evidence of bullish momentum, Bank Nifty is trading at a crucial support which coincides with its rising trend line. The previous resistance of 35,600 is now acting as a strong demand zone, thereby offering a good risk-reward opportunity on the long side. Even the benchmark index Nifty is consolidating around crucial price levels. Support and resistance for Bank Nifty are now placed at 35,500 and 37,500 respectively while those for Nifty are placed at 16,900 and 17,600 respectively. Traders can maintain a neutral outlook and trade with tight stoplosses below immediate supports for long positions.

Nifty50 Update 17 December 2021

Expectations for the week

With no key domestic events expected, Mr.Market will seek cues from global indices and international macroeconomic data such as the US GDP growth rate to determine its movement. The primary market has been buzzing and the bourses will see a slew of listing debuts this week. On the other hand, in the absence of any positive events, secondary markets are projected to stay under pressure. As global macros continue to dominate, investors should monitor FII activities to gauge trendsand follow a stock centric investment approach amid rangebound movement of the indices. The Nifty50 closed the week at 16,985.20, down by 3.00%.

Did the MPC underplay inflation?

Yet another week of whipsaws in the market as the broader sentiment continues to remain ‘Sell on Rise’ with Bears countering the Bulls on every significant upmove. This week’s RBI MPC meet helped elevate Markets’ mood as the policy was more dovish than expected. Contrary to Street expectation, MPC’s policy seems to be taking a larger bias towards growth drivers and underplaying inflation as the MPC reduced the inflation forecast for Q4FY22 and Q1FY23 to 5.7%/5% respectively. At the same time, the largest central bank, the US Fed, is looking to retire the word ‘transitory’ indicating that inflation is here to stay. In fact, countries like New Zealand and South Korea have already hiked their interest rates. Others such as Great Britain, Russia are expected to follow suit as several central banks are increasingly recognizing inflation as a key risk and are therefore announcing policy measures to contain it. But looks like India will remain a backbencher on this front and may look at future policies to set a defined roadmap for future rate hikes.

But why is RBI still biased towards growth and not seeing high inflation trends at least in the current fiscal? The answer is uneven growth recovery! While the GDP numbers do seem encouraging, private consumption accounting for over 60% of our GDP, remains 3% below the pre-pandemic levels. Further, the unorganized sectoris still battling the pandemic blues and is under-represented in the GDP numbers. Many post earnings management commentaries, especially of the FMCG sector, emphasized that rural demand is losing steam. And while we can rejoice that GDP numbers are mildly above pre-pandemic levels, we are still far behind what our growth would have been had the pandemic not occurred. Taking cognizance of these factors and the potential threat posed by Omicron, it seems that MPC’s best option currently was to continue supporting the broader economy. However, for how long can inflation take a backseat in RBI’s strategy, only time will tell.

Event of the week

Insurance numbers for the last month indicate that premiums have seen a pick-up in growth over several months, with private insurers continuing to drive industry growth. A slight increase in the number of policies sold on a YoY basis was observed in the life insurance industry and new business premium collections increased by 41.85%. Life insurers had taken a deep dent on their bottom line due to the surging claims, higher premiums demanded by reinsurers and tightening of underwriting norms earlier in the year. However, the pressure on the margins is expected to bottom outgoing forward given that the pandemic has significantly shifted the perception towards insurance. Additionally, under penetration of insurance as a percentage of our GDP also promises strong headroom for growth which can be capitalized by investors.

Technical Outlook

Nifty 50 closed positive for the second week after witnessing a bounce from the demand zone around 17,000. The index is facing resistance around 17,550 and is currently trading around its 20 DMA. The last two trading sessions of the week exhibited indecisiveness and Nifty 50 continues to trade below the major rising trend line. Similarly, Bank Nifty is also struggling to surpass its resistance at 37,440. All these pieces of evidence hint at limited upside in the short term. Traders are therefore advised to maintain a neutral to mild bearish outlook till Nifty holds its ground above 17,550 levels.

Nifty50 Update 10 December 2021

Expectations for the week

Domestic inflation figures and the FOMC meeting will be key macros to primarily dominate Indian benchmark indices. Since no guidance was provided by the RBI on the rate hike calendar, all eyes will be on FOMC’s stance on tapering and interest rate hike trajectory. While it is widely expected that FED would take the intensity of the Omicron variant into account before aggressively preponing tapering plans, any surprises in the announcements can cause choppy movements. Hence investors should remain cautious and consider value investing till markets continue to let off steam from excess valuations. Nifty 50 closed the week at 17.511.30, up by 1.83%.

Corrections: Inevitable in Bull Markets

Jitters from the free fall witnessed recently crept into the first half of the week. However, D-street has started shrugging off these nerves as markets have seen some recovery as compared to last week. With encouraging economic data such as 8.4% GDP growth in Q2 and manufacturing PMI at 57.6 hitting a 10-month high, investors had something to cheer about. On the other hand, the Street also calibrated concerns about the economic risks from the Omicron strain and the probable speeding of tapering by the FED. Amid worries of high valuations, inflation and Covid driven uncertainties, the sentiment which was ‘greedy’ earlier has switched gears to ‘fear’ in the past few weeks.

Investors should however acknowledge that such corrections are nothing out of the ordinary. In the current bull-run which commenced from March 2020, no substantial correction had occurred so far. Even the drawdown we witnessed recently was under 10%, still lower as compared to the past bull-run average corrections. For instance, while our benchmark indices quadrupled in the 2004-2008 bull-run, over 6 corrections with an average drawdown of 15% during the same period were seen. In fact, one drop was as steep as 30% and it took about 25 weeks to recoup the peak prior to the correction. Even during the 2009-2010 rally, where markets jumped nearly 2.5x, 4 corrections with an average fall of 12% were experienced. History repeats itself more often than not and if we take cues from the past, we can decipher that in a structural bull run, corrections are considered healthy. Therefore as the larger bull market in India seems to be intact, investors should be patient as it would be unwise to expect that the markets will again rally as swiftly as they have since March 2020. Investors can instead utilize this opportunity to top up their investments in financially resilient and quality stocks, rather than panic-selling during such market upheavals.

Event of the week

With November auto sales in, the festive season was not as joyous for automakers as they would have wanted it to be. PV segment witnessed a bumpy ride since the chip shortages continue to hamper production. Two wheelers’ sales were adversely hit on the back of lower footfalls and weak demand off take as marriage season set in. Tractors reported weak numbers due to a high base, delayed Kharif harvest and uneven rural cash-flows. CV segment held its ground with strong growth on yearly basis, however its numbers were a bit disappointing on MoM basis. In terms of future outlook, the growth momentum of CV continues to be robust with a pick-up in the economy, infrastructure, construction and mining. Even the demand outlook in PV segment reflects optimism whereas the two-wheeler segment, especially the entry level segment, is expected to see sluggish demand.

Technical Outlook

After a big bearish candle in the last week, the Nifty 50 index closed positive as compared to the last week, and is trading around the support of 20 EMA on the weekly chart. While this bounce can continue for a few weeks, the correction witnessed has done notable damage to the ongoing momentum. Nifty continues to trade below its rising trend line which had been supporting the uptrend thus far. Traders are therefore advised to maintain a cautious to mildly bullish outlook and to maintain a strict stop loss below the 16,850 level. Immediate support and resistance for Nifty 50 are now placed at 16,850 and 17,600.

Nifty50 Update 03 December 2021

Expectations for the week

With a series of events on the cards, traders should expect an action-packed week ahead. Market participants will try to read between the lines of the RBI's monetary policy outcome. The Governor's statements on inflation will shed light on our economy, inflation concerns and any future moves our central bank may take. Inflation statistics for China and the United States expected next week may cause whipsaw movements in the global markets. Furthermore, as more clarity on the new Covid-19 variant emerges, investors must brace themselves for higher volatility in the markets. The Nifty 50 closed the week at 17,196.7, up by 0.84%.