Govt damage control may trigger stocks rebound: Cover your shorts

The domestic equity market continued to bleed through the week gone by wherein across-the-board selling was witnessed irrespective of the quality of the underlying businesses. To add to it, auto numbers again disappointed the Street, with Maruti reporting the biggest shocker with a 33% YoY decline in July sales.

Local woes were at its peak but now even global factors have started to exert negative pressure on the market. Dow Jones has begun its downward descent from its lifetime highs despite the Fed reducing interest rates by 0.25% with a dovish outlook.

All is not well with global equities as an asset class, but gold can be a defensive play given that a reversal in interest rate cycle has begun. Active investors seeking higher returns must allocate a good chunk of their portfolio, approximately 30 per cent, to gold and lower their equity weightage in order to sail through these testing times.


The selling spree in India can be attributed to the higher taxation on trust entities of FPIs combined with a slowdown in the economy. We think the government may soon act by diluting the excessive provisions in the law. That may act as a relief; for that matter, any reversal in Budget provisions which were taken negatively by the bourses might bring about a relief rally, arresting the fall.

Event of the Week
Zee’s recent deal for a 11% stake sale to Oppenheimer hasn’t been cheered by Dalal Street as business conditions are so bad that a fantastic business such as Zee couldn’t even get at a 25 per cent premium. Also, instead of benefits of a strategic investor to add synergies of vast global presence and a higher open offer price, the deal was signed with a financial investor, belying hopes of an open offer for minority investors. Nonetheless, we expect the deal to put some pressure on debt funds since the recovery for now will be lesser than expected.

Technical Outlook
Nifty50 has swiftly moved south with higher velocity, decisively breaking the rising trendlines. However, the market is are in oversold territory which can lead to quick upward short covering rallies. Volatility has increased giving intraday traders good opportunities provided they are on the right side of the market.

Traders may cover their short positions and wait for rallies to create further short positions. Long trading positions should be avoided from trading perspectives.

Expectation for the Week
The vertical fall that the market witnessed may lead to a sharp bounce thanks to short covering if the government proactively acts to soothe the nerves of the bourses. However, it is not the time for bottom fishing and all rallies should be taken as an opportunity to raise cash in the portfolio levels.

It is extremely difficult to identify bottoms when there is liquidity crisis. The very same analogy was observed in the 2009 crash due to the subprime crises. But for the moment market has settled, relief rally is expected from these levels.

Nifty closed the week at 10,997, down 2.54 per cent.