Positive Earnings Not Good Enough to Keep Markets Edging Higher!
Some would argue that profit-booking is good for the markets and healthy in the long term. However, those investors who bought at the top expecting positive earnings in some of the quality stocks belonging to the most trending sectors are witnessing sharper correction than expected. Indeed, some of the quality high-growth stocks including the likes of IRCTC, Deepak Nitrite, Navin Flourine, etc. were seen dropping by more than 20 per cent from their recent highs. The below estimate results in the chemical companies is what has spooked the investors.
At the same time, we saw in the week gone by how in spite of declaring positive results, several stocks slipped deep into the red. This goes to show that the stock prices are priced to perfection and that there is little room or margin for error when it comes to earnings. These are also the signs of frothy valuations across the sectors. That said, the banking stocks have showed some good traction in the week gone by and promise to remain in the limelight. Nifty Bank hitting an all-time high when the market was correcting shows the relative strength in that sector. The Indian markets in the week gone by have underperformed its global peers.
BSE Sensex has slipped into the red when the European indices and NASDAQ delivered positive returns. A lot will need to happen for the markets to scale new highs from here on as positive earnings is not enough to drive the markets higher. The positive triggers are missing and the market may react only to fresh positive triggers – unknown yet – to scale higher. Investors and momentum traders ought to be extracautious and accumulate high conviction ideas rather than invest lump sum amount aggressively. Exposure to highquality beaten down stocks in the current correction may not be a bad idea.
Earnings’ visibility is the key in this kind of market where the valuation is stretched. Focus on the outlook shared by the management of some of the companies that have declared outstanding results and ascertain if opportunities exist in that space. As far as earnings go, we have seen a mixed performance. Some of the IT stocks have declared outstanding performance; however, concerns on the attrition front continue to create headwinds for the IT sector stocks. Some of the PSU stocks have declared outstanding results this season and can be watched carefully for investment purpose. PSU banks such as IOB and Canara Bank have surprised on the positive side.
Expect some steady performance in the PSU space where the earnings’ growth has been delivered. The global markets look like they may continue to outperform the Indian markets. With the festive season ahead of us a lot the optimism may be seen for automakers and retailers as this period could revive consumer sentiments after the forced lockdowns experienced due to the pandemic. Also, while participating in the markets, avoid taking position on overhyped stocks or stocks which are showing above average volatility. Remember, slow and steady wins the race. In the previous editorial we warned you about a trend reversal in the near term.
Going ahead, the weakness may remain and hence one should buy on dips high-conviction stocks one intends to hold for the long term. Investors need to watch the events in the global markets closely as the central banks in Canada and Brazil have indicated increasing interest rates to tackle rising inflation. Investors need to watch closely the steps taken and announcements made by the central banks around the world as the interest rate tightening will have an adverse impact on equity prices. For momentum traders and investors, it is extremely important to work with stop losses and show discipline. The support zone for Nifty is 17,550-17,450 and the frontline index may face resistance in the zone of 18,300- 18,350.
