Avoid Any Large Leverage
Over the past several weeks the headline index Nifty has displayed immense volatility, oscillating in a wide range of about 9 per cent while presently trading exactly in the middle of it. If we examine the data of the last few weeks, the Indian equities’ index saw a strong technical pullback of close to 1,940 points. From the lows of 16,400, the Nifty rebounded till 18,350 only to sharply pare over 70 per cent of this recovery again. While comparing the worldwide trade setup, global equities were found to have been exposed to comments from the Federal Reserve and on expected lines the tapering is expected to be swifter than before.
This has led to a spike in bond yields. Some expected strength in the US dollar was also seen to be on its way. However, despite all the volatility that was seen in the domestic market, we have fared better than our global peers. As compared on an YTD basis, Nifty has returned a positive return of 1.19 per cent. Against this, S & P 500, tech-heavy NASDAQ and Dow Jones Industrial Average returned negative returns of –3.71 per cent, -7.85 per cent and -1.95 per cent, respectively. As we look ahead from here, the domestic markets are done with all external events to react to.
They are also done with digesting the Union Budget that was presented two days before. The entire technical structure of the domestic markets hints at some broad consolidation once again over the coming days and there are many factors that will contribute to this. Investors also need to be a bit wary of the technical misbehaviour that was seen over the past couple of weeks. It is interesting to take note of the fact that the Nifty has behaved against its crucial DMAs as if they never existed at all. When it came to violating the significant 20, 50 and 100 DMA, it did so without showing the slightest intention to take support or consolidate around that point.
In the same breath, when it had to show a technical rebound, it did so and moved above these DMAs without any deliberation. Another concerning characteristic that the domestic markets have exhibited is a tendency to open with a gap up or a gap down. If we take into account the entire major previous gains or losses, over 70 per cent of them follow a gap up or a down opening. This left the sessions with little intraday movement during the day. The negative impact of such market behaviour is that active market participants cannot profit much from the intraday trend. Even worse, they are forced to take a larger hit owing to a gapped opening.
Such artificial and structured behaviour leads to violation of defined technical behaviour on many occasions. It is important that investors should take note of this. The only remedy that they can have is to have their exposures at modest levels while avoiding any large leverage. The future and option data shows a limited upside for the markets in the immediate short term. This may again cause the markets to slip under a broad-ranged consolidation going ahead from here. The budget has had a heavy focus on consumption and large allocations have been dedicated to infrastructure and development. Over the coming days, we will see sectors like infrastructure, automotive, realty, and consumption performing better in relative terms.
