Reeling Under the Wax-and-Wane Effect
The last one week in the market was all about gaps as in each of the last five trading sessions we have witnessed either the opening of either a gap up or a gap down. What is a gap? If the price of an asset rises or falls significantly from the previous day’s closing without any trade taking place in between, a gap occurs. So, what is causing this significant push-and-pull in the markets? It’s the bond yields. During the end of last week, the bond yields started to retreat from the higher levels, which helped to soothe jittery nerves; else the market feared that the foreign flows which have been a key driver for this stunning Bull Run could come to a halt.
However, after a couple of days of decline, the yields have once again started to firm up and are now inching towards 1.5 per cent, thus once again creating a chaos in the markets. This is like the half glass empty side of story conveying that the rising bond yields are a big concern. However, if one looks at this from the half glass full perspective, high bond yields are not necessarily harmful for economies. Since higher yields are indicating confidence in growth, equities should be the place to be. Despite this push-and-pull, the Indian markets have relatively outperformed the western markets amid continued flow of funds from the FIIs.
FIIs have been net buyers to the tune of Rs 4,437.01 crore while there has been selling witnessed from the DII camp; however, the numbers are modest. Meanwhile, cyclical businesses like commodities are back in the limelight. The price movements in these stocks are sharp and quick on both sides. Since most of these stocks (metals, sugar, paper, cement, textile, power, etc.) have already logged noteworthy gains from their respective lows and are no longer available at economical valuations, the margin of safety in trading these stocks is perceptibly low. Over the past few decades, the commodity cycles have been short and deep.
If this cycle also turns out to be a repeat of what we have seen in the past, in contradiction of a super cycle as widely assumed, the corrections could be hasty and quite disturbing in some of the names. Under these circumstances, most of the momentum traders and smaller traders should opt for trading with small quantities. The reason why we suggest trade with small quantities is because as a trader you can’t win from the sidelines and so the key is obviously to stay in the game. But it is important to determine how much capital one is willing to risk.
Often-times, traders fail to take appropriate risk, subjecting the portfolio to greater risks when they shouldn’t and failing to take enough risk precisely when they should. Remember the famous saying: swinging for the fence also increases the risk of striking out. Talking about what the market has to offer in the coming weeks for investors and traders, from what we have seen in the past one week, the benchmark indices have witnessed sharp moves on the upside as well on the downside. With this sharp rise and fall, the volatility has waxed and waned. As a result, traders are facing challenges while trading in the index. Now, the question arises about whether the same issue i.e. rising bond yields can keep hurting the market again and again?
Remember, when the pandemic crisis hit, initially the markets remained very vulnerable but after a certain period of time they settled and then took off. Similarly, concerns would come and go but the bulls which are surging on the back of liquidity flow and growth prospects would eventually regain strength after a phase of healthy correction. The broader markets are in a dream run and technically many stocks in these segments look appealing. Hence, we would recommend keeping your focus on strong setups i.e. stocks which are forming a solid basis in the broader markets. The level of 14,970-15,000 is crucial for the Nifty in the near term.
