Is Mr. Market caught in a bear trap?
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Markets swayed range-bound this week,
remaining largely indecisive. Prior to this
week, our benchmark indices managed to
quickly recuperate from the losses witnessed
recently. While currently there seems to be
a positive bias, the larger question is
whether this rally is sustainable? Usually,
when a bull rally ends, the first leg of
correction is succeeded by sharp recovery,
popularly known as a “relief rally”. The
relief rally causes market participants to
believe that the correction phase is over,
but eventually leads to an even steeper
correction. Historically, post the bull run
of 1999-2000 peaked, our markets re-bounded
over 30% post the first leg of correction.
However, investors who mistook this as a
continuation of the bull cycle were trapped
as the indices plunged by 45% thereafter.
Even amid this 45% dip, 3 significant relief
rallies occurred. Similarly, the 2008 bear
market saw two while that of 2011 saw four
such relief rallies.
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Coming back to the present, the worst does
seem to be over. Markets have ruled out the
possibility of a global war, have adjusted
to rate hikes projected by FED and have
discounted, to some extent, the impact of
the Covid outbreak in China. Further, our
RBI governor has eased some woes by
reassuring that Indian inflation is still
transitory. Hence, while the chances of this
rally being a bear trap are minimal, markets
are expected to be volatile and to
consolidate within a range in the short term
at least as few dark clouds still hover over
us. The ultimate economic impact of the
Russia-Ukraine war will only be known with
time and will continue to be analyzed.
Further, the possibility of US going through
a recessionary phase as well as the
potential disruption of economic activities
should the new variant spread to other
countries including India will continue to
keep Mr. Market on edge. Therefore,
investors should tread with caution and
invest for the long term in a staggered
manner. |
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Event of the Week |
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As the war between Russia-Ukraine has
resulted in another battle between inflation
and the end consumer, price hikes across the
board products were the talk of the town.
India Inc has sought to pass on the rising
raw material prices to consumers to address
margin concerns. Petrol, diesel and LPG
prices were hiked this week. Further, auto
OEMs, FMCG players, steel
majors, airlines,
paper companies
have also
already hiked their prices and even
indicated further increases. These hikes
will be fully reflected in the inflation
print for the month of April. While RBI
anticipates inflation to moderate in the
coming months and ultimately remain within
its tolerance band, the inflation numbers
for April will reveal the situation on
ground. Crude prices again have risen this
week, crossing $ 120 per barrel, making the
situation even more challenging. |
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Technical Outlook |
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Nifty 50 ended the
week on a negative note after consolidating
in a narrow range of 400 points, and 17,500
level emerged as a critical resistance zone
for the benchmark. While the trend this week
hints that the bullish momentum is slowing,
there is no evidence of bearish confirmation
as of yet. The BankNifty
index, like the
benchmark, is showing relative weakness. We
recommend that traders maintain a mild
bullish bias for the coming week and
continue to buy on dips. Traders should also
keep an eye on how the market reacts to
immediate support near 17,000. Any decisive
break below this level can result in markets
testing 16,400 levels on the downside.
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Expectations for the week |
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Apart from the China Covid outbreak and war
developments, US macro data such as GDP
growth rate and the unemployment rate will
influence global markets. Back home, due to
the last monthly expiry of this fiscal,
volatility will be elevated. Further,
considering that the monthly sales numbers
of automobile companies are expected to be a
mixed bag, D-Street will keep an eye on
companies which miss market estimates. As
markets are likely to remain range-bound in
the absence of any positive news flow,
investors are encouraged to continue
investing in pockets which have reasonable
margin of safety. Nifty50 closed the
week at
17,153, down by 0.78%. |
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Are FIIs poised to make a comeback? |
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This week, Indian markets, in tandem with
global peers, reflected optimism. Though it
appears that markets are regaining lost
grounds, FIIs have continued with their
selling, albeit at a lesser pace, this week
as well. As per NSDL data, FIIs have now
been net sellers in the Indian equity space
for more than 5 consecutive months. Such a
selling streak was last seen during the
global financial crisis in 2008 where FIIs
were net sellers for around 7 months. In
fact, since the start of the current fiscal,
FIIs have pulled out funds to the tune of
~Rs 2.75 lakh crore in the equity cash
segment, which is significantly higher than
the cumulative money pumped in post the
pandemic during May‘20-Mar’21. It is indeed
the unfazed conviction of the domestic
investors who have been incessantly
absorbing the exodus of foreign investors
that is making our markets relatively
resilient. To support this, in last 6
months, banks, financial services and IT
sectors witnessed highest selling in
absolute terms. Despite this, Nifty Bank and Nifty IT fell merely
~3.66% and ~0.01% in the last 6 months
respectively.
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The key triggers which led to FII’s
unwinding their Indian investments were the
overstretched valuations of Indian companies
and the anticipation of a taper tantrum 2.0.
This offload only intensified as the war
began. From where we stand currently, the
valuations of Indian markets have mellowed
down and the geopolitical tensions are also
abating. With Fed’s tapering of bond
purchase now coming to its end and with
enhanced clarity on the roadmap of policy
rate hikes, the extravagant volatility is
likely to moderate. Further, given India’s
structural appeal among emerging markets and
that some part of Russian allocations in
foreign portfolios could find their way to
India, FIIs may be poised to make a comeback
sooner than later. This coupled with the
already buoyant domestic participation can
put bulls back in charge of markets. |
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Event of the Week |
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In an effort to combat the worst inflation
since 1970s, the US Fed announced a 0.25%
increase in its benchmark policy rate for
the first time in 3 years. It also projected
that its policy rate would hit a range
between 1.75% and 2% by this year’s end and
about 2.8% in 2023, the highest level seen
since March 2008. Fed is hopeful that this
hike can tame inflation without toppling the
economy into recession. While markets
globally are rejoicing as Fed's decision has
put uncertainties to rest, the measures
announced can have a serious influence on
RBI ahead of the MPC meeting in early April.
Unlike Fed, RBI has chosen to be
unexpectedly dovish thus far. Further, the
domestic retail inflation also has not yet
materially breached RBI’s comfort zone but
this can be partly attributed to the fact
that rising commodity prices haven’t been
fully passed on till now. Given the evolving
inflation - demand dynamics as well as the
spillover effects of the war, all eyes will
now be on whether the RBI joins the chorus
and modifies its stance in April. |
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Technical Outlook |
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Nifty50 index closed
on a bullish note for the second consecutive
week, successfully sustaining above the
crucial resistance of 16,800 as well as the
20 week EMA. Till Nifty does not close below
16,800, the bullish trend is likely to
continue. While almost all sectoral indices
ended in the green, Nifty small-cap and
midcap indices underperformed. Global
indices also recovered, but if buying
doesn’t emerge at higher levels globally,
then the momentum of Indian indices may slow
down as well. With this backdrop, we suggest
traders to maintain a bullish bias and
initiate fresh long positions on dips only.
Immediate support and resistance are now
placed at 16,600 and 17,500 levels.
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Expectations for the week |
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Given the lack of major domestic events,
Indian markets will take cue from global
counterparts to determine its movement. The
developments in the Russia-Ukraine crisis
will be closely monitored. As crude plays a
pivotal role in determining the fate of
Indian macros, crude price movements will
also be kept an eye on. Further with
increased allocations to ELSS funds as the
year end approaches, DII’s buying momentum
is likely to continue. In absence of any
positive trigger, markets movements are
expected to stay range-bound and investors
are advised to continue with investing in
selective, fundamentally resilient stocks.
The Nifty50 closed this
week at 17,287, up by 3.95%.
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Can the war cool down our economy's steam?
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Markets began the week in a bearish mood,
but appeared to be regaining lost ground as
tensions between Russia-Ukraine began to
de-escalate. While worst may seem to be
over, a prolonged rise in inflation could be
lurking around the corner as multiple
sanctions placed on Russia have sparked an
unbridled rally in commodity prices. India,
though is better equipped, is certainly not
immune to these events. According to
third-quarter GDP statistics, Indian
industry grew at a tepid rate, mainly
attributed to sluggish domestic demand.
Slower government investment and weak rural
demand hampered growth, with agriculture
being a key dragger as it recorded the
lowest growth over the previous 11 quarters.
In fact, as a huge portion of our population
is battling with stagnating or decreasing
incomes and rising living costs, the present
private demand visible is emanating from the
top of the pyramid. This, coupled with
sustained high inflation, may indicate the
evolution of a stagflationary situation
where the economic growth momentum slows.
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If the un-abating rise in commodity prices
were to go on, it would force the companies
across sectors to pass on some hikes to the
end consumer in order to protect their
margins. This would prove to be a double
whammy for them as the price increases can
dent demand, impacting top-line along with
the already trimming bottom-line. This may
eventually cause a slowdown even in
corporate earnings growth trajectory
resulting in more earnings downgrades than
anticipated. Furthermore, a situation like
this would be a major blow to RBI’s stance
on inflation and can lead to a challenging
situation especially since the central bank
may still want to be growth supportive.
While the ultimate consequences of the war
will only be known with time, investors must
remain cautious of the potential macro
challenges India may face. Considering this
backdrop, investors can consider being
overweight on sectors which are inflation
and demand resilient. |
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Event of the Week |
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Airlines eye better days ahead as after a
gap of 2 years, international commercial
flights to and from India, are set to be
fully operational. Resultant, Indian
airlines’ yield is expected be
fuelled by
international segment’s higher margins.
Further, as Covid restrictions fade out, a
gradual pick-up in corporate travel can
catapult demand of air travel. Indicative
February passenger data already suggests an
improvement in air traffic. While there are
these tailwinds underway, the soaring crude
oil prices continue to haunt the recovery of
this sector. Also, with the acquisition of
Air India by Tata group and Akasa
Air’s
probable launch set this summer, the
competitive landscape of the industry is
evolving. While the long term growth
prospects of the sector seem positive, it
will be interesting to watch whether in the
short term, the aviation companies emerge
victorious in combating the continuing high
ATF prices. |
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Technical Outlook |
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Nifty 50 index
closed on a positive note for
the week after a short-covering rally was
witnessed as geopolitical tensions started
easing. Having said that, the short-term
trend still remains bearish on the charts
and Nifty is facing strong selling pressure
around 16,800 levels. The undertone of
global indices continues to be bearish as
well. Till Nifty decisively breaks above
16,800 levels, we suggest traders to
maintain a neutral to the mild bearish
outlook. Aggressive traders can look to take
a short position in the Nifty on a break
below 16,450 while keeping stop loss around
16,750 levels.
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Expectations for the week |
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Along with the ongoing war, outcome of the
Fed's FOMC March meet will be the main
headliner in the coming week. This Fed meet
holds more significance especially as
policymakers cope with a slew of unknowns
due to the Russia-Ukraine conflict. Market
participants will be seeking cues from
FOMC’s view on the inflation risk and on how
aggressive it is prepared to be with
interest rate hikes. Back home, the domestic
inflation rate would be the key metric
influencing market sentiments early next
week as this is the last inflation statistic
to be released before the MPC meeting in
April. Given these key events, volatility
can be elevated and investors are advised to
continue with cherry picking resilient
companies while avoiding vulnerable
counters. Nifty50 closed the
week closed the
week at 16630.5 up by 2.37%. |
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Has the bull run ended?
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After the heavy damage last week, our market
seems to be applying ointment to heal its
wounds. In the recent past, due to the
evolving global tensions coupled with
prolonged sell-on-rise trends, our indices
continue oscillating in a range. Gripped by
fear, investors are vexed by the question of
where are markets headed - have they peaked
and are we in for a serious correction or
are markets merely catching their breadth?
If markets have indeed started descending
after their summit, then we may be in for
prolonged suffering. As witnessed
historically, markets have erased at least
40% of their gains towards the end of bull
cycles. For instance, when the mega bull
runs of 1999-2000, 2003-2008, and 2016-2020
peaked, the market ended up shedding 53%,
65%, and 40% respectively. To top this,
these corrections have lasted for as long as
40 weeks.
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Even though we have seen an over 10%
correction currently, we believe that this
slide can be termed as a ‘pause’ before the
rally resumes and not the start of a bear
market. This is because given historical
trends, whenever a bull rally has been
preceded by a sizeable dip, our indices have
more than doubled from the pre-dip peaks.
This time around, our indices are yet well
below the 2x levels. Even on fundamental
grounds our economy has a good runway, given
the underlying stellar corporate earnings
momentum, the cleansed balance sheets,
improving asset quality of the banks, levers
in place for capex cycle revival and credit
off-take, probable manufacturing resurgence
given PLI and other government reforms. This
coupled with increasing DII participation
can propel the markets to new heights once
prevailing clouds of uncertainty disappear.
Peter Lynch has said, “Far more money has
been lost by investors trying to anticipate
corrections, than lost in the corrections
themselves.” Investors should therefore stay
put and invest for the long haul, instead of
stressing over short term.
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Event of the Week |
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Auto sales numbers in February unveil a
mixed bag of numbers. Two-wheeler sales saw
deep cuts due to the bleak demand trends in
the domestic market exacerbated by rural
distress. Meanwhile, tractor sales remained
subdued owing to a high base, significant
price hikes affecting retail demand, and
above-normal inventory levels within the
channel. Passenger vehicle sales, on the
other hand, rebounded with an improvement in
chip supplies and increasing economic
activity fuelled commercial vehicle sales.
While the, the auto industry has barely
begun its recovery, Russia-Ukraine crises
aggravated concerns as sustained higher
crude and commodity prices are expected to
dent margins. Additionally, with Russia and
Ukraine being major exporters of certain
metals and gases used for chip making, any
further disruptions in supply chains can
certainly add to the woes of automakers.
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Technical Outlook |
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The Nifty50 index
continued to trade under pressure and closed
on a negative note. Volatility continues to
be high and almost every day of the week,
the index had an opening with a gap. The BankNifty index
which was outperforming the benchmark index
largely since the start of this year, has
also turned into an underperformer. BankNifty is now
trading just above the support zone of
34,100. Since there has been structural
damage to the major uptrend, we reiterate
our view that traders should maintain a
cautious to bearish bias. Having said this,
brief short-covering bounces cannot be ruled
out as geopolitical developments will keep
influencing our markets. Immediate
resistance and support for Nifty50 are now
placed at 16,800 and 16,200 respectively.
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Expectations for the week |
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The ongoing geopolitical tension would be
the major influencing factor deciding
market’s direction. On the macroeconomic
front, investors will be closely watching
the inflation figures for China and United
States. As the commodity and crude prices
are going off the roof amid the war,
inflation data becomes a key monitorable to
assess the course of action to be adopted by
Fed. Back home, the state election outcome,
which is due in the coming week, will also
impact investor sentiment. Considering these
events, market’s range-bound movement is
likely to persist and investors can resort
to selective buying while maintaining an
overall cautious outlook. The Nifty50 closed the
week at 16,245.35, down by 2.48%.
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