After a big jump, Mr Market cools down ahead of earnings season

The domestic equity market continued to be buoyant throughout the week gone by, albeit with a kneejerk reaction to the news of the move to impeach President Trump. Monthly F&O expiry took all the weaklings out of the market, which has helped cap volatility on the upside for the time being.

Given the massive rally, Mr Market is now expected to cool down till the beginning of the earnings season. On one hand, FPIs have turned neutral, with sporadic buying of quality names, while the government has started hustling after taking a huge Rs 1,45,000 lakh crore hit on its annual revenue. The hunt is on to get back the money from other sources; the proof being the revival of some of the past disinvestment agendas.

This would bring vibrancy to the capital market, but at the same time, suck away liquidity from the bourses, which is a negative for the stock market.


The race for IPOs has begun. The urgency to raise capital, not only by the government but also by private players, is by far more intense than at any time in the past. IRCTC is a classic example of the government’s hunger for capital. Soon, private sector companies will come forth to claim a share of retail investors’ money.

One can think of subscribing to the IRCTC IPO given the reasonable valuation, at 19 times earnings, its asset-light model and high earnings visibility. It promises good listing gains.

Event of the week

Debt capitulation is still under way. While many measures have been announced to ease the crisis, the poison of large debt is still oozing. Zee’s debt issue remains unresolved beyond the deadline that the company had set earlier. HDIL capitulated and took PMC Bank down along with it. ADAG Group firms still struggle as the deadlines draw closer, and share prices of Reliance Power, Reliance Infra, Reliance Capital show that there is pain ahead and it will impact market sentiment.

Technical Outlook

Nifty50 has begun to consolidate after a massive rally. All short-term indicators have moved to the overbought zone, which has capped the upside for the time being. Short positions have reduced with month-end expiry and, therefore, significant upside is not expected in the near term. A 50 per cent retracement is expected before any rally begins. Traders can go long in the 11,000-11,100 zone.

Expectations for the week

Mr Market quickly adjusted itself to the gains from tax cut by rising 7-10 per cent, while sectorally discounting the tax cut. Hereinafter, the journey forward would happen largely if actual growth returns. One-time tax gains will not trigger any sustained buying in the market. The earnings season would bring cheers, but that could be shortlived unless ground-level consumption pattern improves. Thus, the tax effect should be ignored while assessing the earnings numbers.

Globally, metal prices are correcting sharply but the India’s listed businesses are rising, creating a negative divergence. Investors should avoid metal stocks for the moment while traders may short for quick gains. Financial stocks and private sector banks should also be avoided as valuations have reached historic higher levels. Paper and breweries are already going north. A similar thing is playing out in the fertilizer space. All in all, investors should wait for a correction in the market before investing afresh.

Nifty50 closed the week 2.1 higher at 11,512.