Headline Indices May Take A Breather, Action To Continue In Broader Markets

If one recalls the commercial ad of the well-known amusement park-Essel World, it says ‘Essel World mein rahunga main, ghar nahi nahi jaunga main!’ This is what the market participants are humming these days on D-street, as the sight of D-Street is not less than an amusement park, where market participants are enjoying the rides of the stocks as the latter are hitting upper circuits or a fresh high on bourses, which is quite normal these days. Further, the breadth, which was languishing for the majority part of CY2019, looks promising. Now, if you remember we have been signing the bullish anthem for the broader indices not once but a multiple times in our editorials. Hope our readers have benefited from this view! To display the outperformance of the broader markets against Nifty, here is a brief update since the beginning of January, where the broader markets, Nifty mid-cap and small-cap has risen 5.16 and 7.47 per cent, respectively, as against Nifty’s 1.53 per cent.

Talking about Nifty, as expected earlier, the 12,350-400 zone has been attainted and all our near-term targets have been met. For the Nifty, as it trades at a lifetime high, the trend is clearly upward. But, the momentum is waning. Just as a high is the new normal, the negative divergences have become normal. In the meantime, most of the large-caps seem to look exhausted or in a topping formation. Some of the large-caps are also trading with stretched valuation. The question now is whether this rally will continue till the Budget. In that respect, let us examine multiple scenarios. Historically, in majority of the cases, the markets have made a major top in January or in the first quarter of the calendar year. Most of the peaks witnessed high Price Earnings (PE) ratio of 28 and above. However, the fact is that Nifty midcap and small-cap indices, which are trading decisively above the 200-DMA, is a positive sign for the market. Nifty midcap 100 indices have broken out of the falling wedge and this is a bullish reversal sign.

Meanwhile, the concerns continue to flow on the shores for the domestic markets as the ogre of inflation is rearing its head yet again. Prices at the retail as well as the wholesale level have been rising at a rate much faster than expected. Retail inflation for the month of December jumped 7.35 per cent and it has breached RBI’s medium-term target of 4 per cent for the third straight month. Hopes of a rate cut in the ensuing RBI meet (to be held on February 6) have been dashed because inflationary pressures are once again creating a strain.

In the west, US markets continue to trek higher. Both the Dow and the S&P 500 closed at record highs at the signing of the long-anticipated phase-one trade agreement between US and China, marking a truce in the dispute over import tariffs which has unsettled markets world-wide for nearly two years. The markets, however, trimmed gains and closed well of their day’s high as the markets demonstrated the classic behaviour of ‘buy the rumour, sell the news’.

We have seen that markets purely work on sentiments and currently, the sentiments are very good. Hence, this reminds us of the quote from Rakesh Jhunjhunwala, popularly known as the ‘Big Bull’ or as we know him, the ‘Warren Buffet of India’. He has said, “Vadhere vadhare levanu vadhare vadhare beichavanu,” that means, buy as the market is rising and sell when the market is falling. If the market is rising, ‘vadhere vadhare’ means, its momentum is upwards. You buy on the rise, and if markets are going down, you sell on the fall. Hence, continue to focus on quality and momentum stocks. Hence, these are a few basic points for our readers as we have seen maximum number of sins committed by investors when the markets are in momentum.

Here are a few words to keep in mind: Buy only into sound companies and do not buy companies hitting new lows or which have huge debt and major liquidity issues.