Broader Markets Showing Relative Strength
The past one week has not been cheerful for investors who have been focused on large-caps for outperformance. At the same time, those investors who looked at small-caps and midcaps should have been able to beat the frontline indices quite easily. The broad-based rally in broader markets with healthy advance decline ratio is a healthy sign for the bulls. The Indian markets once again underperformed the European peers in the week gone by. The DJIA index slipped into the red but slipped less than the BSE Sensex which was down by 0.24 per cent. S & P 500 VIX was up by more than 16 per cent in the week gone by even as emerging market indices such as Bovespa of Brazil and Shanghai of China outperformed the Indian benchmark indices.
We saw that the financial and banking shares weakened over the past seven days while shares of capital goods, consumer durables and automobile companies showed relative strength. As of now the global markets are also showing some signs of fatigue and profit-booking. Clearly the inflation worries are impacting the market sentiment which, along with the fundamentals and earnings, is an important aspect that decides the market trend in the near to medium term. With the inflation fear clearly bothering investors, expect some headwinds for the markets in the near term.
As Arcelor Mittal Europe reported EBITDA of USD 2,209 million with an increase of 40 per cent QoQ, one can expect positive sentiment in metal stocks. The strong earnings by steel companies even though factored in by the markets may act as a positive trigger in the near term. The rising demand for industrial metals given the improvement in the global economic activities and the massive US infrastructure bill augurs well for the steel prices looking ahead. However, the problems in Chinese economy owing to the ongoing property crisis and stern energy usage limitations leading to a spike in power prices around the globe may hamper economic recovery in China, which is the largest metal consuming economy.
Expected slowdown in the Chinese economy is having a negative impact on the market sentiment at this point of time. The earnings’ season continues to be strong and there are several companies that have reported above estimate results. Investors and momentum traders should not ignore the quality earnings’ of the companies and should also focus on the management guidance and business outlook for the coming quarters. One story that keeps making rounds is that of clean energy. We can see that several companies, especially micro-cap and small-cap related to the clean energy business, are outperforming the markets.
It is possible that high beta names outperform the markets in the near term and the defensive provide support in the current environment. The IT and pharmaceutical sector stocks may soon catch investors’ attention and hence should be on their watch list. Looking at the market trend right now it looks more like a sell on rise market rather than buy on dip markets for the momentum trader and investors. For long-term investors, however, the broad structure of the market is still bullish, and one can continue to accumulate. The key support area for Nifty 50 is in the zone of 17,660- 17,600 as the recent swing low and 50-day EMA is placed in this zone. On the upside, the level of 18,112 will act as immediate resistance for the index.
