Pricing anomalies in pockets show market due for a serious correction

The market opened for the week with positive sentiment but the same got punctured when the noise about impeaching the US President became louder. Irrespective of such rhetoric, the Indian market had moved ahead of fundamentals although corporate earnings were no big surprises.

PSU banks had reported mild profits after heavy writeoffs in the previous year, but in some cases asset quality deteriorated further during the quarter, but stock prices have still defied gravity. Many of the PSU bank shares have doubled in just four months. Such price actions are totally divergent from underlying fundamentals. Therefore, a serious correction is overdue in the market in order to correct such anomaly erupting in many pockets.

Even good numbers too are very well known and discounted by the market. Hindustan Unilever posted great Q4 numbers, but the stock has stalled; JSW Steel posted 47% growth in top line and profits tripled, still the stock was down by few percentage points. Bajaj Auto’s Q4 profits were down 17 per cent, Aditya Birla Nuvo’s profits were down by 52 per cent, but the stocks currently do not reflect such reality and hence a correction would be a safety check for the market.

Events of the Week
GST rates are finally fixed. In general, they are non-inflationary and fair to the pockets of a vast majority of population. The rates are progressive, which will go a long way in reducing income inequality and promoting inclusive growth in the economy.
The setting up of an investigation committee headed by former FBI Director Mueller to look into the charges of Russian interference during Trump’s Presidential campaign would be significant for global financial markets. If the charges are proved, then an impeachment would become certain, leading to massive selloffs in the US markets as was the case during President Richard Nixon in 1974, when the market had fallen 25 per cent after he resigned in August 1974 fearing an imminent impeachment.

Technical Outlook
The market’s upward trajectory has at last come to an end. On the weekly chart, a shooting star formation confirms the most likely course of action, i.e. down in the short to medium term. The upward velocity since last two weeks was already weakening and the formation of a ‘shooting star’ creates a high probability of correction setting in the market.
The Bank Nifty chart suggests that the 15-month-old bullish channel shall act as a major resistance and selling pressure is likely to increase. Traders are advised to book profits on all long trades. Shorts could be initiated if the higher top, higher bottom sequence is broken below 9,300. If the 9,300 level is broken in Nifty50, it will increase the possibility of deeper and longer corrections.

Expectations for the Week
The euphoric mood of the market has turned cautious overnight and if history is any guide, the situation is going to worsen further before it gets better. The market oscillates between cycles of optimism and pessimism in all time frames. It seems that the pendulum has swung too far towards optimism, which can be confirmed through the BankNifty, wherein an all-time high open interest is hiding silently whereas the world is looking at Nifty50’s open interest, which is still much below that in the previous peak.
The leadership has changed and so will the market direction in the intermediate term. It would be wise to book substantial profits currently and go for summer vacation. Investors should wait for some time before restarting their investments in quality stocks.

The Nifty50 closed the week at 9,427, up 0.28 per cent.