Easing VIX, drop in FII selloff signal another short bounceback in April

Markets continued to succumb to the bears during the week gone by after a short bounceback during the earlier week. Such dead-cat bounces shouldn’t be mistaken as the beginning of bull market rallies; yet there are indications that the market is expected to witness another short-term bounce in the coming weeks.

First of all, selling pressure has continued although to a lesser extent, which shows that FPIs have reduced the quantum of selling. India VIX, which is the fear barometer, is also showing signs of fear ebbing, which has resulted into lower volatility. It had touched the 83 level towards the end of March and it has been declining to sub-60 levels ever since. Open Interest in Nifty is down by 50-60% and stock futures are showing signs that the market is light in terms of leverage.

Moreover, commodities haven’t witnessed panic selling recently and have sort of stabilised. All these point to the markets having priced in most of the negatives as of now. US equities, too, are showing reduced correlation between stock price decline and the spike in Covid-19 positive cases. This indicates that sanity is slowly returning and markets have assumed that they would take a while before the Covid-19 cases peak and drive markets into a wait-and-watch mode.


On the other hand, the much-talked-about crude oil is witnessing sudden spikes amid talks of oversupply and production cuts between the US, Russia and Saudis. The price war between the two biggest oil producers is indeed going to decide the fate of crude, as the lockdown has impacted demand tremendously with barrels of crude oil piling up and the storage space getting exhausted. A decline in crude oil price has led to the fall of first wicket in the US, where Whiting Petroleum Corp has filed for bankruptcy.

If there is no conclusion between the warring nations, crude price can induce system-wide risks in the economies worldwide.

Event of the Week
March auto numbers plummeted on the impact of the lockdown; two-wheelers saw a decline of about 45-55%, passenger vehicles fell 50-60% and commercial vehicles 80-90% on a YoY basis. The sales numbers for April 2020 may be even worse, courtesy lockdown.

However, the recent price correction in the stocks from the sector seems to have already factored in the slowdown in performance. Hope for a scrappage policy that may be around the corner, when the government announces an economic package in the near term, will immensely aid this sector. The auto sector is not for the faint hearted. Those with risk appetite should only consider.

Technical Outlook
After opening negative for the week, Nifty traded in a comparatively narrow range between 8,130 and 8,680 levels and continued to consolidate. Indian market, in line with global indices, is trying to stabilise for now in spite of an escalation in health risks worldwide. The recent selloff caused significant price damage within a very short period, and hence, the market is likely to oscillate in a broad range of 1,000 points.

The market is likely to witness a period of time correction going ahead with a mild positive to sideways movement for a week or two. We suggest traders to go long if Nifty50 sustains above the 8,000 mark, keeping that level as stop loss for long positions.

Expectation for the Week
It can reasonably be expected that the government will announce a second round of economic relief package before the lockdown is lifted by mid-April. However, in anticipation of such a package, markets are likely to witness bounces. Pharma stocks look resilient and seem to be affected very little by the lockdown. Traders can take long positions in this space.

Financials may rebound after the relief package is announced, so one can wait and watch for the time being. As an asset allocation strategy, one can go for quality corporate bonds with yields of around 12% or higher in these stressful times. Investors are advised to continue their mutual fund SIPs, which would help them take advantage of the irrationally beaten down prices. Stay home and Stay safe!

Nifty50 closed the week at 8,083, down 6.7%.