Have the Bulls lost their grip?

A euphoric rally ended on Monday when Nifty50 crashed from its highs by 3.35%. Such a crash came amidst the banking sector optimism which was the last hiding sector to participate in the current jubilance. Historically, such wide ranging days have often been marked as turning points in the market. Though the media might attribute this to an Indo-Sino stand-off but the most logical reason was that markets were extremely overbought, optimism was at its peak, FPIs were heavily buying - herd mentality was at its epitome. When all these reasons are seen from a realist perspective, it can be reasonably concluded that the intermediate top is in place for now and from here onwards a more tiring and long-lasting correction may begin. The same FPIs sold massively in the month of March and the first half of April. Therefore, too much should not be read into FPI inflows but a rather sane approach should be taken by investors and traders before betting their hard earned money at the current juncture.

Indian markets have largely mirrored US markets, however, it seems Nasdaq is repeating its 1999-2000 type Dot-Com rally, although in a different avatar and off course with a different set of companies. The participants today are FAANG which by some estimates puts their combined market cap larger than the entire European Union market, this is at best described as height of insanity or irrational exuberance. The current price action in FAANG stocks suggest that they might have peaked and the fall has just begun.

Event of the week

The Supreme Court is known to have made path breaking judgments in the past which have been a make or break for corporates. Currently, the fight between borrowers (strong builders lobby) and banks seem to be reaching its pinnacle. No wonder! If businesses could not be run due to force majeure events then how can interest run 24x7? Basis the media reports it looks like the Supreme Court is inclined to give some relief to borrowers for their hardships due to closure of businesses in lockdown. Eventually, banks could have to pay the price which might cascade to the entire banking sector and BankNifty might trace its steps back to March 2020 levels. This needs to be watched closely; Fingers crossed!

Technical Outlook

Nifty 50 closed on a negative note forming a bearish engulfing candle after a very long time. The Banking index, which is a major contributor to the benchmark index also closed with significant losses. The index has been trading at the upper end of the channel on a weekly chart and has been overbought for an extended time along with global indices. The recent weakness is witnessed across the globe with some emerging market indices having been struggling since the last few weeks. We suggest traders lighten the long positions in the market and maintain a sell on rally outlook once the immediate support of 11100 is broken on the downside. Nifty might head to test the lower end of the channel which is placed at 10,700 levels. Immediate resistance is now placed at 11,600.



Expectation for the week

Indian markets seem to have largely discounted all good factors given the economy has almost opened up. However, the aftermath of COVID-19 will now be felt in the run up to Q2 & Q3 earnings performance. Since markets had bottomed prior to lockdowns, by the same logic markets should register a top once the economy opens up. Globally, stock markets have bounced back on a varied scale depending upon the size of the economy and the impact of Covid. Economies like France is still struggling and their stock market witnessed a below average bounce, at the same time, Germany has done comparatively better and its stock market had an above average rally. Therefore, going ahead, ground level reality of the economy will drive the stock market momentum which currently seems to be in a dull phase. Investors are advised to book profits and increase cash in their portfolio. Investors should stay away for a deeper correction. Nifty50 closed the week at 11,333.9, down by 2.7%.