Beware! Market may reverse quickly: Don’t be aggressive, remain cautious

The domestic equity market witnessed a sudden bout of optimism during the week gone by, as hopes of tax relaxation on equities cheered the Street. Investors ramped up stock buying but this indeed poses a risk in the short term, as such tax reductions are unlikely to happen immediately. Even if they do happen, it will be in the Union Budget for 2020-21.

Since the run-up in the market was too fast within a short span of days, there is every likelihood of a swift correction in the near term.

The government has already reached 92.6 per cent of its budgeted estimates for India’s fiscal deficit in 2019-20. Therefore, the next six months will certainly be challenging for our bureaucrats to raise timely resources. It is quite likely that a massive amount of government divestment along with asset monetisation might impact the secondary market.

Positive sentiment in the market may reverse quickly near the highs of the market. Warren Buffett has rightly said that as an investor, it is wise to be ‘Fearful when others are greedy and greedy when others are fearful.’ Hence, jumping the gun at such overbought levels is not a wise idea as Mr Market always tends to behave contrary to consensus views.

September quarter corporate numbers have certainly not disappointed the Street, as revenues grew, albeit in single digits, and profits rose due to corporate tax cut gains.

However, it is surprising that statistical economic data for September 2019 suggested a 5.2 per cent drop in core sector output growth, which was apparently worst in 14 years.

This indeed sends out contrasting signals about the economy. If such numbers are to be believed, there is every likelihood that the market would see a correction in the near term, because things do not change overnight at the ground level, but stock markets can very well change quickly through swift price actions.

Event of the week

The US Fed trimmed interest rates by 25 bps for the third time this year, which was a non-event for the Dow Jones index. An alteration in the Fed statement brought out that “further rate cuts would emerge only if the economic outlook changes materially,” which is a negative for Mr Market. However, at this point in time what poses a major threat is the outcome of POTUS’ impeachment enquiry, which has the ability to rattle global equities, including ours, and create turmoil in the short run.

Technical Outlook

Nifty50 is losing its velocity on the upside, making it ripe for a correction. Oscillators are showing weakness, which is not a good sign for the bulls. Nifty and Bank Nifty are showing divergence. Bank Nifty is not participating in the rally, which means that the rally is a fractured one, which will trigger selling at higher levels. Traders should book profits, exit long positions and initiate short positions on weakness.

Expectation for the week

We believe that Mr Market would turn volatile in the weeks ahead, as it will witness profit booking at higher levels. There will also see a churn in largecaps with inflows into select midcaps. Certainly, the bitten down sectors may witness an up-move and the ones that saw a good rally may linger at current levels. Since there is an environment of uncertainty, investors should pick up stocks with great caution.

Pharma, metals and mining, agriculture are some of the beaten-down sectors that should be considered from an individual stock picking perspective. They are available at cheaper valuations and, hence, can be good avenues to look at. Private banks and financials should be avoided currently.

Nifty closed the week at 11,890, up 2.6 per cent.