Follow the Leader
The plot of bulls on D-Street is that of any sprinter who, after a quick run, stands for a few moments to catch his breath. The markets has taken giant strides since the March lows and witnessed a stupendous one way rally of nearly 50 per cent with every critical resistance being dispatched to the casualty. However, now the index has settled in a trading range from 10,845-11,380. The lower boundary of trading range is a result of important long-term moving average i.e. 200-DMA and the upper boundary is a result of 78.6 per cent retracement level of a sharp fall from February-March along with weekly trendline obtained by joining bottoms made in October 2018 and September 2019.
Even though the frontline gauges have put their hands on the knee and are taking a deep breath, the broader indices have been the show-stopper for the last week as Nifty Midcap and Smallcap have gained nearly 3.89 and 4.32 per cent, respectively, from last Thursday’s close to this Thursday’s close. On Wall Street, the rally continued with the S&P 500 within a whisker from its all-time high and also Dow Jones is not too far away from its all-time high. Better than anticipated economic data and optimism over efforts to produce a vaccine have been cited as key drivers for recent gains. The recent US CPI data helped boost the confidence of market participants about economic recovery remaining on track.
The fear gauge of the Indian equity market, the India VIX index, was something that was on the boil in the month of March. Now, it is quoting very close to the 20-mark over a five-month low and moreover, on Thursday it recorded its eighth consecutive day of loss. One could easily say the volatility due to uncertainty in the markets is not at all visible as much as uncertainty about everything. There is so much up in the air right now – the pandemic, economy recovery, earnings revival, the over-stretched valuations – that there are just too many factors at play for the average investor to predict which stocks are opportunities and which are pitfalls.
If you don’t know what to do, then how do you make a decision? You follow the lead of somebody with experience and knowledge and time and again through our editorial we have communicated the right theme at the right inflection point, be it the pharmaceuticals sector followed by agrochemicals and also very recently in the month of June we highlighted the defence theme. Certainly then, investors and readers who have followed our advice would have generated alpha returns. The re-rating of the defence stock had been after the government’s decision to reserve 101 items in the defence import roster and this has opened the door for billions of dollars’ worth of orders for Indian defence companies.
Interestingly, the foreign portfolio investments (FPIs) in domestic equities have turned positive for the year. In the month of March 2020, FPIs registered a record outflow of fund from the Indian equities. However, thereafter they have been net buyers in each of the month. This inflow of money could be due to the aggressive stimulus of global central banks, resulting into softening of yields in the debt market. On the other hand, the flow of money by DIIs into the equities market has remained subdued in the months of July and August. Equity mutual funds witnessed a net outflow of Rs 2,480 crore in July, thereby resulting in the first withdrawal in nearly four years.
The Nifty seems to be set in a trading range from 10,845-11,380 and as long as Nifty oscillates in this range it can be viewed as a consolidation phase. When would this range resolve is the common question amongst the trader fraternity. Well, to answer it in a simpler manner, we would like quote Tom Williams who said, “Unless the ‘smart money’ is interested in the move it is certainly not going to rise very far.” We would advise traders to look for trading opportunities beyond the index trading as opportunities are available in the broader markets.
