Is Mr. Market caught in a bear trap?

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.

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.

Event of the Week

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.

Technical Outlook

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.

Nifty50 Update 25 March 2022

Expectations for the week

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%.

Are FIIs poised to make a comeback?

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.

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.

Event of the Week

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.

Technical Outlook

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.

Nifty50 Update 20 March 2022

Expectations for the week

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%.

Can the war cool down our economy's steam?

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.

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.

Event of the Week

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.

Technical Outlook

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.

Nifty50 Update 11 March 2022

Expectations for the week

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%.

Has the bull run ended?

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.

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.

Event of the Week

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.

Technical Outlook

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.

Nifty50 Update 4 March 2022

Expectations for the week

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%.