Stay Bullish with Ears to the Ground

As Russian revolutionary Vladimir Llyich Lenin once said, “There are decades where nothing happens; and there are weeks where decades happen.” This quote is quite an apt one to describe the current state of the Indian equity markets. The benchmark index Nifty 50 hit a fresh all-time on Thursday but the state of broader indices in the last few trading sessions has sent a shiver down the spine of the investors. The Nifty Mid-Cap and Small-Cap indices witnessed correction of about 5 per cent and 8 per cent, respectively, from a recent high to Wednesday’s low. Though the correction in the broader indices was in a single digit, many stocks witnessed double-digit corrections in a matter of few days.

What triggered this correction in the broader indices? One reason could be the circular published by BSE a few days ago stating that beyond the current strict measures of circuit filters and additional surveillance mechanism, it is mulling to impose further restrictions and curbs on price movement of the shares that trade on its platform. The new restrictions threaten to slow the pace at which the stock price can increase and that has spooked investors and stock brokers. This move was clearly not appreciated by investors and brokers, and this was clearly reflected in heavy selling in the broader markets over at least three to four sessions.

However, BSE released a clarification note stating that the said framework is applicable to BSE exclusive securities in certain groups, viz. X, XT, Z, ZP, ZY and Y. Post this clarification we saw a stunning recovery in the broader indices. However, talking about the comeback, the month of August has been all about a comeback by the heavyweights. On a month-todate basis (MTD) heavyweights like HDFC and HDFC Bank have jumped 9 per cent and 5 per cent, respectively. Reliance Industries is also up by nearly 4 per cent, Kotak Mahindra Bank is up 8 per cent and Bharti Airtel has been the crown jewel as it has logged double-digit gain so far in the month of August.

So, currently we are in a scenario where the market is having a split personality. The top 20-30 stocks are seen doing something and the rest of the stocks from the Nifty 500 basket are seeing doing something completely opposite to it. It is typically a market capitalisation rotation which is a part and parcel of a bull market. Earlier the complaint was that the top heavyweight stocks from Nifty 50 were not performing while the rest of the stocks from Nifty 500 index were having a ball. This story would continue where we see passing the torch of leadership from one sector to another. You cannot have a scenario where everything does well at the same time. All stocks can do well at the same time only when there is complete euphoria.

Thankfully we are not there yet as there still remains a lot of scepticism around. However, the Nifty 50 index charts continue to be positive. The charts of top heavyweights are in a good shape whereas for some mid-caps and small-caps they are distorted. One needs to follow proper due diligence before committing to stocks from this space. On the sectoral front, the Nifty IT chart looks fabulous and it seems there is more steam left in these stocks. Hence, keep a close watch on quality IT names for investment. Another index displaying positive signs is Bank Nifty.

Currently, the banking index is seen facing resistance in the band of 36,200-36,350. Expect some fireworks once this zone is pierced on a closing basis in the near term. Historically, we have seen that when IT and banking stocks do well at the same time, it’s a joy ride on D-Street. Our view on the market stays bullish considering the current structure of the charts. At the same time we would say it would be a stock-pickers market. Hence, don’t go too much by intraday action. Look at the bigger picture. And more importantly, follow the concept of Dow Theory which says that if an index or a stock is making higher highs and higher lows, stay with it irrespective of scary news flow and valuation concerns on the ground. That’s because price action is the best testimony of a trend!