Let the Uncertainty Settle Down
The sentiments on D-Street have turned 180 degrees given the fact that indices scaling to new heights each passing day have now become a home ground for bears. A fall of 100 points in the Nifty – a rare phenomenon indeed – has become the new normal as in the last five trading sessions the Nifty has slipped almost 1,000 points from the top and for the first time since September 2020 lows it has recorded losses for five days in a row. This action is a good illustration of something that Dough Kass, a senior portfolio manager, often says: “The market has no memory from day to day.”
The fall is being witnessed despite some heartening news with the International Monetary Fund (IMF) having upgraded its gross domestic product (GDP) projection for India to a contraction of 8 per cent in FY21 from its earlier projection of minus 10.3 per cent. Further; it expects the Indian economy to post 11.5 per cent GDP growth in FY22. A sudden fall in indices have left market observers dumbfounded as they try to ascertain what has led to a change in the landscape all of a sudden despite the flow of good news. What we are currently witnessing in the markets is a classic case of ‘buy on bad news and sell on good news’.
As per this strategy, a market participant buys when the narratives are quite gloomy and sells when the outlook turns rosy. Isn’t this what we are witnessing about price movements in the markets? With the roll-out of the vaccine, earnings’ revival and economic indicators pointing towards faster economy recovery, we have all the good news one could have asked for, but in reality we are seeing the markets sliding down. This is actually how the markets function and hence booking profit on your investment is as important as making the investment itself.
Another phenomenon of which everyone is talking about these days and which was witnessed in the US markets very recently is that of ‘short squeeze.’ Warrior Trading defines short squeeze as a trading term that takes place when a stock that is heavily shorted all of a sudden gets some kind of catalyst which attracts a lot of new buyers into the stock. When this happens, the stock is bought up and the shorts are forced to cover their positions (getting squeezed out), which then results in more buying that can lead to a rapid rise in the stock prices.
The short squeeze was witnessed in the stock named Gamestop Corporation, which was quoting around USD 17.25 at the start of the year and closed at USD 347.51 on January 27. The short squeeze was caused by retail traders when people started to talk about this stock on a Reddit forum as a candidate for the next big trade – the ‘YOLO’ (you only live once) bet. Talking about upcoming events, the countdown has begun for the Union Budget 2021. In the wake of a statement made by the finance minister saying that it would be a “budget like never before”, expectations are running sky high.
We believe the key themes for the upcoming budget would be healthcare spending, disinvestment and tackling NPAs. One of the biggest health emergencies witnessed by mankind has been the pandemic and it has made us realise that we can no longer take health spending and infrastructure lightly. India has long been languishing at the bottom of the pyramid in terms of health spending. According to Oxfam’s 2020 Commitment to Reducing Inequality (CRI) index, India spends just 4 per cent of its budget on health – the fourth lowest in the world with the country ranked 129 out of 158 countries. Hence, healthcare spending would be given top priority. Disinvestment was one of the key highlights of the last budget when the finance minister set a highly ambitious target of Rs 2.1 lakh crore which, however, could not be met due to the pandemic.
As such, the current budget may set the tone for an aggressive target as the government would be able to use the proceeds for infrastructure spending. A proper plan to achieve this target is expected to be rolled out. Meanwhile, a long-standing idea of creating a ‘bad bank’ could be finalised which will help banks to absorb NPAs. Some sops for MSMEs and announcements for badly impacted segments like travel and tourism would be announced. After a splendid rally in the last two months, both the Nifty and Bank Nifty have concluded the January series in negative terrain owing to sharp sell-off witnessed in the past five trading sessions.
With the global landscape turning sour, FIIs’ flow taking a back seat and the distribution day’s count remaining elevated, we feel that the ongoing correction could continue till the uncertainty related to the Union Budget settles down. The zone of 13,500-13,600 is likely to act as a good support zone and investors may start buying in a staggered manner around these levels. The mantra going forward would be to stay with quality stocks and away from the momentum-driven small-cap stocks given the basic approach that leaders will start a fresh round of rally and then the broader markets will jump on to the bandwagon.
