Too much pessimism suggests a short-term rally around the corner

Selling pressure continued in frontline stocks on Dalal Street during the week gone by. The jewels, too, came down debunking the myth that HDFCs and Bajajs of the market only go up. The NBFC crisis has now started hurting even these best-managed companies, wherein they have sounded caution on asset quality going ahead.

Post elections, FPIs have continuously sold close to Rs 12,332 crore worth of equities in June and July. However, during the same period in the first term of Modi regime back in 2014, there was a net inflow of Rs 27,101 crore.

Markets alternate between bull and bear phases and this time around; we have an ominous start for the next five years. There is a lot of pessimism and monthly expiries have been turning points for the market in the short term.


Hence, there is likelihood of a deeper fall.

Moreover, liquidity infusion has taken another hit as the government plans to raise $10 billion sovereign offshore bonds has run into the wall. The much-needed liquidity to lubricate the economy has been delayed. The massive bet tht FPIs have taken by investing Rs 8,739 crore in Indian bond market in July might go haywire due to the postponement of sovereign bond raising. In every likelihood, this liquidity crisis might continue till Diwali.

Event of the Week
FPIs own around 80 per cent of the assets in India, which is a large chunk in comparison to what sovereign funds and pension funds own. The government’s latest moves – be it the extra tax or postponement of borrowing plan from offshore bond markets – will largely affect FPI decisions to invest in India. This will have a larger consequential impact on our stock market in the medium term.

Technical Outlook
During the week, Nifty50 continued to slide but the velocity has waned, indicating that a bounce is around the corner. Indicators are showing extreme oversold conditions in the short term. In addition the market is likely to find buyers near its May lows. Profits can be booked on short positions and investors should wait on the side lines till clarity emerges on whether the market movement in coming weeks is a dead cat bounce or a genuine bull market rally.

Expectations for the Week
Dalal Street will cheer an interest rate cut by the US Fed, which may signal that a slowdown is brewing in the global economy and support from banks and governments will continue. This will also scream out the fact that all is not well with the US bull market that is nearing its all-time highs.

There is no statistical evidence that an interest rate reduction will bring in a bull market. In fact, history suggests there is a correlation between interest rate reduction and stock market falls. In any case, there are more risks in the equity market than in the past five years and investors are advised not to go bottom-fishing.

Although with a short-term view, the market may be enticing the bulls to buy insurance, stocks from real estate and private banks and financials are currently moving higher. Nonetheless, investors should must restraint buying currently.

The Nifty50 ended the week at 11,284, down 1.18 per cent.