Market Not Out Of The Woods Despite Govt 'Stimulus'
The domestic markets were on a downward spiral since the first half of August and emotions of fear were ruling the roost on the D-Street. Having said that, just like there is sunrise after the darkness, the markets witnessed a V-shaped recovery that was also supported with participation from most of the sectors. The biggest thorn in the flesh which saw the markets crack impulsively were the surcharge on FPIs and the concerns of slowdown in the economy. With the surcharge on FPIs being rolled back and announcement of a slew of measures by the government to counter the slowdown in the economy, the obvious reaction was a huge jump in the index as the short traders were forced to press the short covering button. Soon another booster shot came in the form of RBI accepting Bimal Jalan committee's recommendations and approving the transfer of funds to the tune of 1.76 lakh crore to the Government of India. All these measures were just what the doctor ordered. The RBI move could permit the government to kick-start a much-needed public spending push, alongside possible paring of the fiscal deficit. In fact, with all the positive news flow, it did not enthuse FPIs as they continue their selling and sold shares worth Rs 15,005 crore in the month of August till date and, hence, we have seen bulls retreating from the recent highs. Another factor that is keeping the investors across the globe on the tenterhooks is the ‘Bond’. If you are a fan of the Hollywood's celebrated spy thriller series, the first thing that will come to your mind hearing the word 'Bond' is the famous dialogue ‘My name is Bond, James Bond’. But, well, we are not talking about James Bond or any Hollywood blockbuster, but a bond which has been a cause of pain for investors these days, i.e. ‘US treasury bond’. Economic journalists lately are devoting a lot of ink and computer pixels to the red hot issue of the inverted yield curve. The so-called yield curve has been a reliable warning sign of recession historically and the current yield inversion is fuelling fears of an imminent economic recession.
Amid all this topsy-turvy developments, the investor is in a quandary, nagged by some fundamental questions, such as will this recovery be just an effort to come out of oversold position? Will the stimulus be enough to overcome the global slowdown? Will the earnings next season give a positive surprise? Well, to answer nagging questions in a simple manner, we would say that we are still cautious on the markets in the short term as, after the recovery from the recent lows, the Nifty Price-Earnings (PE) once again moved into a bubble zone at 27.33. This shows that we are still trading on overstretched valuations. Though the broader market indices corrected almost 40 per cent, they are still a long way from breakout point. Also, the Nifty price structure is still in the lower highs and lower lows formation, which indicates cautiousness. Nifty failing to surpass the 11,150 mark or its 200-DMA is giving some indication that we are still not out of the woods. For the coming week, the zone of 11,150-11,200 is likely to act as stiff resistance as it is the confluence of 38.2 per cent retracement of the decline seen from July 5 and the last three week’s high placed at 11,181 and the 200-DMA (11,207). A close above the 200-DMA will give the much-needed confidence to the bulls, but until then, it is safe to assume that it is just a dead cat bounce.
The bulls are in search of further triggers for a fresh upmove and, going forward, the market participants would take cues from the upcoming Q1FY20 GDP data, currency movement and the auto sales figures. Globally, all eyes will now be on the action on the US-China trade front from September. The White House is scheduled to impose the first stage of US tariffs on $300 billion worth of Chinese imported goods at the start of September month, when China is set to respond with tariffs on the US products in retaliation.
