Don't mistake a bounce for a rally

Uncertain times call for panic and markets have reacted accordingly since the past few weeks. However, it seems that panic selling has now come to a halt, atleast for the time being. The revival in confidence to some extent can be attributed to the Government's efforts world over. After US' USD 2Tn stimulus, a whopping 9.5% of its GDP, Germany's 21.1% of its GDP granted as stimulus, China's 2.8%, India's stimulus quantum looks small but nonetheless is arriving in piecemeal packets regularly. While these are temporary steroids for the economy, nobody can estimate the intensity of the pain that this pandemic and lockdown is going to befall upon our economy and businesses. The assurance of various timely measures by the Government and Regulatory bodies have been a relief but the situation at hand will surely have a far-reaching recessionary impact. Earnings contraction in the next two quarters is certainly a given with tourism, airlines, hotels, metals, retail outlets not under essential goods getting impacted the most, but by when will they recover is the million-dollar question. Lower Brent prices is a God sent relief in the midst of all this mayhem. However, investors must not mistake this bounce as a sharp rally, but a normal correction which will face selling pressure at higher levels.

Markets had corrected over 30% from highs of January 2020 and the recent bounce was expected given that markets were deeply sold into virus fear. However, we expect the bounce to be approximately 38% to 50% of the fall in the next 2/3 weeks. If the situation escalates further, there will be more gloom and, in that case, markets can certainly make fresh lows. But for now, Government's complete lock down is acting as a ray of hope for the bulls to come back.

Event of the week

Today, RBI announced infusion of liquidity worth Rs. 3.74 Lakh Crs i.e. 3.2% of GDP by trimming down CRR by 1%, reducing interest rate by 75 bps to 4.4% and other liquidity boosting instruments which would ease fund raising issues in the short term. Though RBI's decision to allow a 3 months moratorium instead of 6 on payment of EMIs on loan and working capital requirement has disappointed many. But, RBI is playing every card in its pocket to prevent a crisis like situation by giving banks the ability to lend sufficiently. However, no direct helping hand has been given to aid industries as of now.

Technical Outlook

Nifty50, on weekly chart, posted a big bullish candle after five continuous losing streaks, however, it closed the week on a mildly negative note after recovering almost 15 percent from recent lows of 7511.10. In the last trading session also after a strong opening and a later positive surprise by the RBI, the benchmark index closed near the previous close, which is a bearish characteristic when markets do not respond to positive events. In the short-term, support and resistance for Nifty50 are placed at 7600 and 9050 respectively. Market is currently oversold and has room for bounce back. Traders with sizable risk appetite should maintain appropriate stop losses as India VIX is expected to remain at this level. Selling on rallies and buying on dips, both opportunities would be available to traders.

Nifty50 Update 27 March 2020

Expectation for the week

In these uncertain times, the hope is as concluded by our Hon'ble Finance Minister 'As things develop, we will come back..' And investors should remember these timeless words by Dr. Robert Schuller 'Tough Times Never Last, but Tough People Do!' and in our case tough businesses do last. India Inc's earnings are expected to contract in the next few quarters given the sudden halt but the search for warriors who can emerge stronger should be the end goal. Investors should primarily look for debt free companies with resilient business operations. New world order will emerge once Covid-19 is left behind, many new business opportunities will arise and nothing has to be taken for granted. For example, cigarette consumption may reduce whereas sanitizers may become a daily consumable item. Consumer habits are likely to change when they come out after a lockdown. Wait and watch with selective buying should be adopted by investors at this level. Be safe and healthy. Nifty closed the week at 8660.25, down by 1%.

Don't Wait For Bottom; Hit Buy When Market Freezes!

Markets experienced huge loss of confidence this week as bears took over and gripped D-Street. This is a Black Swan category price destruction which was unprecedented caused by acute fear of survival of mankind. It is very rare that indices themselves experience a lower circuit through trading freeze and this occurs during extreme fearful sentiments. However, if we look back into the history, financial markets have reacted in a similar manner be it during the deadly Spanish flu, World Wars or The Great October Crash of 1987 when the Dow fell 22.32%. It is nothing but the fear of survival that caused this extreme reaction in the markets. Such fall can only be witnessed in financial markets because they are liquid but not witnessed in real economy, contrast this, in a similar situation, a farmer will not sell his land if for one year the weather is bad, similarly, investors too should not be selling their core equity holdings just because this year will be bad for the economy. It would be ideal to go contra and start accumulating. The wisest rule in investment is: when others are selling, buy.

Now figuring out bottoms or identifying the epitome of fear is extremely difficult for an investor. A good indicator could be a "lower freeze" when no one wants to buy and there is negativity all across the market. Nifty50 witnessed the biggest sell off in this decade which culminated into a 'lower freeze' at 8624.05 levels - most likely indicating a panic bottom for the immediate term. It is the unemotional, unbiased, clear thinker that will make traders and investors winners in the stock market rather than getting shrouded under current all-pervasive negative sentiments.

Event of the week

While equities are undergoing huge volatility, commodities and currencies aren't left behind. The week began with a massive crash in oil prices with the end of a cartel between Russia and Saudi Arabia. As this marks the beginning of a price war between the two major oil exporters, India is a silent spectator being an importer. Oil is actually being considered as a tool in order to control the economy just like wars. How the future trajectory pans out only time will tell, but India will clearly benefit out of this.

Technical Outlook

Nifty50 after opening well below the rising channel closed sharply lower as much as the width of the channel. The recent week was very volatile and marked the biggest weekly range almost the double of the said channel. The index tested 100 month EMA on monthly chart which was never seen after 2008 bottom. This was an extreme overreaction clouded by coronavirus and global equity sell off. Increase in volume confirms that panic selling is almost over. This forms a short-term bottom at least for some time and traders can exploit this opportunity for a sizable up-move by taking buying on dips.

Nifty50 Update 13 March 2020

Expectation for the week

Government and Regulators are likely to announce concerted action to revive sentiments, inject liquidity and reduce health concerns across the economy inline with global efforts. It should bring in stability. This appears to be a great opportunity for investors to invest in quality compounders for the next decade and create wealth. Sectors such as FMCG sector, consumer durables, IT, private sector banks can be looked at for accumulation while cyclicals such as metals, PSUs should be avoided although they are attractively priced. At best, cyclicals could prove to be trading bets for traders in the medium term. Nifty closed the week at 10023.65, down by 8.8%.

Mr. Market is above all Opinions

During the week, market witnessed nerve wrecking volatility which often happens during extreme fear. The reasons for fear may be different when seen from a historical perspective, but the very same history vindicates the fact that those times were opportunities to buy; certainly not the situations to sell. It succinctly reflects that the more things change, the more they remain same. This is what investors should keep in mind while sailing through such uncertain times. It was widely felt by the market participants that the recent US Fed rate cut of 50 bps was a pro-active step. But it was actually the reverse. Mr. Market's behavior dictated the Fed to reduce interest rates which can be inferred from the 10-year US Treasury yields which had started to fall from 1.50% since mid-February to nearly 1% when Fed formally reduced the rate. Market forces were so swift and fast that Fed had no other option but to trim rates in line with the market's expectation. Hence, the saying 'market forces are above all'.

Inspite of such massive fear psychosis, open interest in the F&O segment at an aggregate level has not reduced significantly. This means that we are somewhat away from making a major bottom which most likely can be witnessed during March 2020 expiry. It can also be hoped that by that time the most "untouchable" word Coronavirus would have possibly obliterated. This will give April a fresh start for the bulls into the new financial year.

Event of the week

IL&FS type crisis was witnessed during the current week. When such NBFC crisis hit market due to DHFL & IL&FS, markets took around 2-3 weeks to adjust to the liquidity spillover effects. Currently, the Yes Bank saga too, is expected to settle in the coming 2-3 weeks. Hopefully March end would end the fear which will give new financial year a fresh beginning.

Technical Outlook

After witnessing heavy sell off, the index is trading at the lower end of the rising channel, which has supported multiple selloffs in the past and will therefore act as a strong support currently at 10800-850 which is evident on daily charts. The current situation properly aligns with short term panic bottoms, channel support along with deep oversold levels will act as strong support for the bears to cover their short positions and will give bulls a chance to make a short term come back.

Nifty50 Update 06 March 2020

Expectation for the week

Given the volatility and fearful psychology, market participants are likely to drift away and reduce their exposure to equities till clarity emerges on financial distress (Yes Bank and COVID-19). RBI might deliver a surprise rate cut and Yes Bank baby will be taken care off by the bell weather mother of all financial institutions of India, SBI and LIC, this should calm the nerves of the market. Markets are expected to remain low with subdued interest and little activity from active investors. However, investors and high tax payers will have a very good opportunity to invest in ELSS funds before the year end to take advantage of 10-12% correction in frontline stocks. Investors should also accumulate respective leaders from private sector banks, NBFC, FMCG, IT and pharmaceutical sectors as these will provide good return on investment from a 3-5 years perspective. Warren Buffett quotes, 'Be fearful when others are greedy' should guide all investors. Nifty closed the week at 10989, down by 5.5%.