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Nifty 50 index closed the week with a mild gain (PTI)
Nifty 50 index closed the week with a mild gain (PTI)

Markets are high on optimism but low on buying conviction

  • Going ahead, markets could make an intermediate top with correction in front-line stocks.
  • India Inc.’s quarterly results have come to an end and markets are likely to keep an eye on global clues

Markets during the week traded with a few gap up openings owing to positive international clues. But soon the optimism receded and fears of a resurgence in cases of coronavirus, power tussle in the US and rich valuations led to a mild positive end to the week. FPIs with their massive liquidity strength eventually aren’t buying as aggressively post the first two weeks of November. And this points that optimism has reached its peak at least from an intermediate point of view. On a daily basis upwards of 10 stocks are included in the F&O ban list which suggests that optimism is running high in general and markets are loitering around its overbought zone and therefore a healthy correction is underway which would calm down the bulls-in-charge. Despite good news in a few stocks, they didn’t react as strongly like they should have.

When such ground level optimism does not take stock prices higher, it is an indication that markets are in an overbought zone. And once FPIs relax the heavy buying, markets may witness a near-term healthy correction in coming months.

During October, domestic mutual funds observed an outflow for the fourth consecutive month to the tune of Rs. 2,725 crore when compared to an outflow of 734 crore in September. It can be inferred that either equity fund managers continue to book profits at every higher level or investors are raising liquidity by selling their mutual fund units eventually pressurizing fund managers to sell equities. It is quite surprising that DIIs being a major market participant have continued their selling journey all the way up and this month too they have net sold equities worth Rs. 30,000 crore to date. All this signals that domestic biggies are thinking ahead of time and are pre-empting a likely correction.

Event of the Week

The US indices felt tremors on news of a termination of their key pandemic lending programs by the end of December. This sudden termination of lending programs would unravel the unpleasant part of the virus which may have a snowball effect on the bleeding global economy. Further, this decision may not bode well with both the Republicans and Democrats as they would find difficulties in alleviating the stress in the economy due to coronavirus. Coping up with Biden’s victory and the power conflict between US Treasury Secretary and Federal Reserve might cause jittery in benchmark indices which can translate to Dalal Street as well.

Technical Outlook

Nifty 50 index closed the week with a mild gain after making an all-time high of 12963. But now the benchmark index has formed a bullish reversal pattern which opened with a gap near highs of the week and then gave up all the gains. The rally’s velocity has also been declining along with the volume participation. Infact, Nifty has started facing resistance at the rising channel visible on the weekly chart and might continue to struggle going ahead as it lacks participation from the top index movers like ICICI Bank, HDFC and banking stocks, who have also become a bit stretched on the upside in the short term. We suggest traders to keep an eye on the benchmark and go short unless it breaks the rising channel on the upside.

Expectations for the Week

Bourses are likely to witness bouts of buying in the lower order stocks hinting a catch-up rally. In fact, industry laggards such as mid and small caps are ready and are trying to catch-up the industry leaders in terms of a price movement. Going ahead, markets could make an intermediate top with correction in front-line stocks. India Inc.’s quarterly results have come to an end and markets are likely to keep an eye on global clues and/or any major updates related to the vaccine for any direction. Investors are advised to book profits at these higher levels and patiently wait for a healthy correction for a buy on dips strategy. Top quality IT and Pharma names can be accumulated at current levels. Nifty50 closed the week at 12,859, up by 0.62%.

Nirali Shah is senior research analyst at Samco Securities

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