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Wednesday, July 28, 2021

Multiple spoilers ahead, time for Dalal Street bulls to turn vigilant

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During the week gone by, the domestic equity market continued its momentum in smallcap and midcap stocks while largecaps consolidated.

The Indian market is largely trying to mirror global indices from a directional perspective. Countries such as Taiwan, which had negligible impact of Covid-19, are racing to new highs and developed countries like the UK are still 20-22 per cent down from their yearly highs on account of local issues and slower demand revival.

Further, in countries like the US and Japan, where government revival packages were colossal ($1-2 trillion), stock markets have nearly touched their yearly highs, whereas in countries where the stimulus packages were comparatively petty, the markets are lagging and down nearly 18-20 per cent from their yearly highs.

But Indian bourses are defying these trends, and dancing to the tunes of global optimism and have managed to dodge the petty economic stimulus package ($22.50 billion).

This optimism in domestic bourses without the onset of structured economic revival policies succinctly suggests that disparity in risk-reward is diminishing for the bulls and investors need to remain vigilant by taking the upbeat sentiment with a pinch of salt.

Domestic institutions seem to have played smartly and are currently on a selling spree. They bought in lumps during March-April lows and have now been frantically selling in August when markets are in an upbeat mode, which signals their cautious outlook for domestic stocks.

Conversely, panicky FPIs were seen selling majorly in March-April and have slowly started investing since then. Ahh! FOMO or recency bias for FPIs?

Event of the Week

The bulls are aiding the government raise small ticket amounts in the form of FPOs. The current optimism in the market has been a blessing in disguise for the cash-strapped government to raise money in order to reignite the economic engines. The current rally in PSU stocks might see a pause as the government has started the process to raise money through FPOs in IRCTC and Hindustan Aeronautics. A few more FPOs could also hit Dalal Street over the next few months. However, it is advisable that investors remain cautious while associating with any PSUs as their omnipresent supply overhang makes them vastly unfavourable.

Technical Outlook
Nifty50 closed the week on a positive note, but experienced highly volatile gap-up and gap-down starts during the week.

The index now trades at the confluence zone of trendline resistance drawn by connecting the previous pivotal lows and the 78.6 percent Fibonacci retracement of all-time highs to the bottom of 7,500.

This is a crucial juncture with no participation from index movers and the banking sector is already struggling with its own set of problems and underperformance. The short-term trend is still intact and bullish, but only a limited upside is left. We maintain a cautious view. The immediate support for Nifty now stands at 11,100.

Y20ET CONTRIBUTORS

Expectation for the Week

Going ahead, Mr Market will take cues from the profound theatrics happening in the US. Given that the presidential elections there are just 73 days away, markets across the globe will hold on to the important signals emanating from the presidential campaigns. India Inc‘s June quarter earnings season is over and, as expected, it largely turned out to be a one-off dark quarter. The market reacted maturely, but now it is keeping an eye out for the numbers for forthcoming quarters, which may show the real impact of Covid-19 across sectors and stocks.

But that is still some time away, wherein the market might resort to aggression looking at the Q2 numbers. Investors are advised to remain on the sidelines and may look to book profits. However, the momentum in smallcaps and midcaps is still strong, though there is no assurance that the same will continue in the future. It is time to be cautious and have decent liquidity at the portfolio level.

Nifty50 closed the week at 11,371, up 1.7 per cent.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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