Markets Finally Aligning with Reality

Markets during the week witnessed massive selling amidst steep valuation and a tech bubble burst in the US, but by the end of the week there was part rebound. It can be said that indices across the world are now mean reverting and correcting on fears of a second wave of COVID-19, weak signs of demand revival and high unemployment. Bourses are now aligning to ground level realities and reacting sharply on any negative global cues. The banking sector which is seen as a bridge between real and financial economy had anyway underperformed the March-September rally and is now finally experiencing selling pressure. All the QIPs in the financial space such as ICICI and Axis Bank have been concluded at a much higher price and FPIs are now sitting at paper losses. Nonetheless, a healthy downturn in this sector now, especially in private lenders will offer a good chance to investors to accumulate quality names for their portfolio. The prices of Banking sector can come back to the March/April lows which will be good entry opportunity for investors.

Whenever optimism prevails, there are a slew of IPOs and this time too is no different. The novelty of something new excites every human which leads to the euphoria around subscribing to IPOs for listing gains and making a quick buck. Two recent consecutive IPOs have witnessed a frenzied listing of over 100%. Traditionally, such magnitude of first day listing premiums and a boatload pipeline of IPOs have been sturdy indicators of market euphoria. As long as the IPO pipeline doesn't dry up, Mr. Market is likely to inch lower in anticipation of liquidity being sucked out. Investors should be very cautious before subscribing to IPOs and should look for listing gains only rather than subscribe for the long term given the volatile market conditions.

Event of the week

Nasdaq witnessed massive selling akin to a bubble burst in the tech space which reminds us of a similar crash witnessed 20 years ago wherein Nasdaq lost steam amidst rising optimism and euphoria. FAANG and the likes which were enjoying a concentrated rally suddenly witnessed heavy selling pressure. This cascaded to Indian markets and Nifty cracked giving up 4%. Going forward, it seems that the tides could turn against the tech companies in the US. However, the Indian IT players should not be mistaken with US's tech space, given the innate differences in business model and predictability in cashflows. Infact, India's IT companies seem relatively safer since they aren't in the bubble category yet in terms of valuations like in the United States.

Technical Outlook

Nifty50 fell sharply and made a big bearish candle after remaining overbought for an extended period. The weakness was broad-based along with negative sentiments in global markets. The index is now trading at rising channel support, which also coincides with short-term averages of 20 EMA on a weekly time frame. Traders should remain watchful of whether the price holds at these levels for a next up move. A decisive break below 10800 will lead to opening of lower targets up to 10500-10400 levels. The immediate outlook on a majority of sectors is bearish, thus we suggest traders maintain a bearish bias unless we see any signs of bullish evidence at channel support. The immediate support and resistance are now placed at 10850 and 11200.

Nifty50 Update 25 September 2020

Expectation for the week

With the inception of October series, market participants are expected to keep a keen eye on the upcoming MPC meet by RBI and apex court's decision on interest on interest waiver. A temporary pause on any further rate cuts given the rising retail inflation seems to be the popular word on the Street. Additionally, the financial service sector should be closely tracked as any conclusive decision by the Supreme Court would remove the overhang from the sector and nominal clarity may emerge. Any additional economic stimulus package from the government would increase overall optimism in the market. Investors are advised to be abreast with these developments and keep their shopping lists of quality stocks ready for cherry pricking. Investors should slowly start buying on decline. Nifty50 closed the week at 11050.3, down by 4%.

Small and Midcaps: Apna Time Aagaya?

Markets during the week continued its momentum with small & midcaps witnessing renewed buying interest, courtesy SEBI circular. SEBI's move was to streamline multicap fund category to allocate atleast 25% to large, mid and small caps each by February 2021. And this succinctly paved the way for this sharp and abrupt buying interest in quality small & midcap businesses. If we were to believe the collective wisdom of Mr. Market, handful of quality small & midcap stocks witnessed prolific exuberance which was reflected in their weekly price gain. Going by the adage of 'Mr. Market is always right,'' investors are advised to make note of such quality small & midcap names and look to enter on declines.

Peeping into global markets, US market witnessed its biggest software IPO this year, Snowflake, which more than doubled on its first day of trading on NYSE. Such kind of frenzy reminds of the hysteria witnessed two decades ago which culminated into what we call today 'The Dot-com bubble'. Such maniac listing for a company which is not yet profitable, even though sales are growing rapidly, is a sign of clear hysteria. Such indicators may perhaps hint towards a plausible bubble taking shape in the world of listed tech startups. However, taking a 360-degree view, broader markets still seems to be lagging and offers value in many under-owned and under-researched sectors – not only in the US but also in India.

Event of the week

Reiterating its stand, Federal Reserve Chairman Jerome Powell, signaled that it will keep interest rates near zero for at least three years until the US economy heals from the effects of the COVID-19 pandemic and the labor market recovers. He added that Fed will keep interest rates near zero until US inflation rises above its 2% target for an unspecified duration of time. At the grassroot level, it seems that ground level economies across the globe would atleast take two-three years to recover from the jolt of the pandemic. And therefore, the current disconnect between forward looking Mr. Market and backward looking Ms. Economy may persist.

Technical Outlook

Nifty50 closed on a negative note and traded in a very narrow range during the entire week. The index saw strong participation from Pharma and IT sectors while the Banking and Financial stocks which have the largest weights on the index underperformed and BankNifty closed the week in red with losses of almost 2 percent. The Nifty index is trading in an overbought zone in sync with global indices and minor fractures in the form of corrections may continue. We maintain a cautious stance on the market and suggest traders to remain watchful of key levels. The immediate support and resistances are now placed at 11200 and 11630 respectively.

Nifty50 Update 18 September 2020

Expectation for the week

Indian stock markets have started witnessing a slew of money raising exercise making it a festival of IPOs. Renowned names like Computer Age Management Services (CAMS), UTI Asset Management Company, Angel Broking to name a few are looking to access primary markets before Diwali. Anecdotally, when such IPOs start hitting D-Street a trading mentality arises in the minds of retail investors who subscribe and book profits on the day of listing itself rather than sticking with the IPOs for longer. Such profits further increase risk taking appetite both in primary and secondary markets causing bullish sentiments and when too many companies line up for IPOs, the liquidity is squeezed out of the market causing major corrections. But until then inventors are advised to follow a stock-specific approach by skewing their trading bets towards strong momentum sectors like Pharma and IT and wait for a correction before investing. Nifty50 closed the week at 11505, up by 0.4%.

NASDAQ's Crack Will Rattle Global Equities

During the week, the confidence of the bulls got shattered when tech-focused US companies crashed rattling the entire financial markets. Nasdaq's crash does not look like a normal correction but seems like a bigger downward spiral unfolding after valuations sky-rocketed. Given that US elections are only 52 days away, it seems unlikely that US markets will make fresh highs again and there is every likelihood that selling pressure may continue even in broader markets. Crude oil too has given up most of its gains and prices are below USD 40 per barrel on expectations of lower demand going ahead which suggests that global recovery might take longer than earlier anticipated. In contrast surprisingly, gold's move is not hinting at any major crash in the financial markets, given that gold prices consolidated and remained steady even when Nasdaq plummeted.

One of the important ways to analyze the psyche of an investor is by measuring mutual funds' cashflows. Contrary to previous behavior, retail investors have aggressively pressed the redemption button in July and August which is at a 10-year high amounting to nearly Rs. 8,000 Crs of net outflows in two months. These manic withdrawals by mutual fund investors give a two-fold indication: Either there is liquidity crunch in household savings rate or the high valuation of Mr. market is making investors cautious. Both these instances do not augur well for Indian capital markets. There is a huge line up of IPOs and FPOs and markets have already rallied by nearly 50% from March lows. If mutual fund redemptions are taken as any valid indication, plans to raise money by corporates and government may undergo a limbo and the entire bull rally might get punctured. In summary, they suggest that markets are at elevated levels and risk reward ratio is absolutely not in favor of investors. There is a lot to lose on the downside and limited gain on the upside if Mutual Funds outflows are analyzed correctly.

Event of the week

The Supreme Court is yet to pass an order on the issue of charging compound interest and credit rating/downgrading during the moratorium period. The Apex court too passed an interim direction holding that the accounts not declared as NPA as on August 31, 2020 shall not be declared as NPAs till further notice. This direction though gives a temporary relief to the financial services sector but the pain in the overall economy surely persists and is only delayed. Therefore, participants from this space, majorly banks are bound to remain under pressure until there is further clarity on the issue.

Technical Outlook

Nifty50 after posting a bearish engulfing pattern in the previous week, traded in a narrow range this week. However, the BankNifty index closed on a negative note after forming a bearish cloud cover last week. The overall sentiment remained muted in the market and the bullish move in selected index movers such as Reliance led the nifty index to surge higher. The benchmark index is still trading in an overbought zone on a weekly time frame and we maintain a bearish outlook going ahead expecting the index to retest the lower end of the channel drawn from March lows on a weekly chart. Immediate support and resistances are now placed at 11180 and 11590 respectively.

Nifty50 Update 11 September 2020

Expectation for the week

As we get closer to the US elections, the bigger the theatrics get both politically and economically. Markets across the globe would remain watchful and may react and adapt to any important news from the presidential campaigns. Back home, given the onset of a slack period post quarterly results, markets could be majorly driven by heavyweight constituents. RIL is a top contender to keep Nifty afloat given its second wave of fund raising spree for its retail arm. And this might probably keep the overall market sentiment positive. Subdued crude prices, economies opening up, consolidation of gold may cumulatively indicate that markets are relatively better placed than the situation a few months ago. Nonetheless, investors should not read much into heavyweights as global cues are neutral to negative and should remain cautious. Investors are advised to remain on the sidelines and look to increase liquidity in their portfolio. Nifty50 closed the week at 11464.5, up by 1.2%.

Have the Bulls lost their grip?

A euphoric rally ended on Monday when Nifty50 crashed from its highs by 3.35%. Such a crash came amidst the banking sector optimism which was the last hiding sector to participate in the current jubilance. Historically, such wide ranging days have often been marked as turning points in the market. Though the media might attribute this to an Indo-Sino stand-off but the most logical reason was that markets were extremely overbought, optimism was at its peak, FPIs were heavily buying – herd mentality was at its epitome. When all these reasons are seen from a realist perspective, it can be reasonably concluded that the intermediate top is in place for now and from here onwards a more tiring and long-lasting correction may begin. The same FPIs sold massively in the month of March and the first half of April. Therefore, too much should not be read into FPI inflows but a rather sane approach should be taken by investors and traders before betting their hard earned money at the current juncture.

Indian markets have largely mirrored US markets, however, it seems Nasdaq is repeating its 1999-2000 type Dot-Com rally, although in a different avatar and off course with a different set of companies. The participants today are FAANG which by some estimates puts their combined market cap larger than the entire European Union market, this is at best described as height of insanity or irrational exuberance. The current price action in FAANG stocks suggest that they might have peaked and the fall has just begun.

Event of the week

The Supreme Court is known to have made path breaking judgments in the past which have been a make or break for corporates. Currently, the fight between borrowers (strong builders lobby) and banks seem to be reaching its pinnacle. No wonder! If businesses could not be run due to force majeure events then how can interest run 24x7? Basis the media reports it looks like the Supreme Court is inclined to give some relief to borrowers for their hardships due to closure of businesses in lockdown. Eventually, banks could have to pay the price which might cascade to the entire banking sector and BankNifty might trace its steps back to March 2020 levels. This needs to be watched closely; Fingers crossed!

Technical Outlook

Nifty 50 closed on a negative note forming a bearish engulfing candle after a very long time. The Banking index, which is a major contributor to the benchmark index also closed with significant losses. The index has been trading at the upper end of the channel on a weekly chart and has been overbought for an extended time along with global indices. The recent weakness is witnessed across the globe with some emerging market indices having been struggling since the last few weeks. We suggest traders lighten the long positions in the market and maintain a sell on rally outlook once the immediate support of 11100 is broken on the downside. Nifty might head to test the lower end of the channel which is placed at 10700 levels. Immediate resistance is now placed at 11600.

Nifty50 Update 04 September 2020

Expectation for the week

Indian markets seem to have largely discounted all good factors given the economy has almost opened up. However, the aftermath of COVID-19 will now be felt in the run up to Q2 & Q3 earnings performance. Since markets had bottomed prior to lockdowns, by the same logic markets should register a top once the economy opens up. Globally, stock markets have bounced back on a varied scale depending upon the size of the economy and the impact of Covid. Economies like France is still struggling and their stock market witnessed a below average bounce, at the same time, Germany has done comparatively better and its stock market had an above average rally. Therefore, going ahead, ground level reality of the economy will drive the stock market momentum which currently seems to be in a dull phase. Investors are advised to book profits and increase cash in their portfolio. Investors should stay away for a deeper correction. Nifty50 closed the week at 11333.9, down by 2.7%.