Market nears overbought level: Book profits and avoid buying

During the week gone by, the domestic equity market continued its euphoric rally with less participation from the broader indices.

It is observed that the percentage of shares moving in tandem with Nifty50 is far lower than what it was witnessed in previous few weeks. Early earnings numbers for June quarter are being cheered, but a good part of Q1 outcome is yet to come and that may not portray a promising picture.

IT, FMCG and financial services, including banks, have given an early indication that all is well! But nonetheless Covid-19 in itself was raison d’être. IT companies managed to trim their operating costs, banking businesses were given leeway by RBI for delay in NPA classification, whereas financial services witnessed people staying indoors, transacting digitally to procure insurance policies for their loved ones, along with a lot of trading and investing. But this may not continue for long.

When ground reality catches up and life after Covid-19 becomes the new normal, the exceptional gains that are being cheered by the Street currently will lose sheen. Mr Market has a habit of overreacting to short-term events and that is why it would be prudent to avoid consensus views on the Street that IT, FMCG, financial services, including banks, will perform better in the near to medium term. Book profits or at least avoid them.

In last nine days, FPIs too have been a part of the FOMO rally. They have bought Indian equities worth around Rs 5,413 crore. Since beginning of March’s fall, it was seen that FPIs had sold aggressively in the month of April, May and June except their participation in Kotak’s QIP, RIL’s rights issue besides stake sales by HUL, Bharti Airtel and others, which were not purchases from the secondary market.

However, since then this is the first time they have bought aggressively to this tune directly from the secondary market. Historically, FPIs buy aggressively at tops and sell at bottoms.


Event of the Week
The European Union leaders have agreed to an exceptional stimulus package worth $860 billion to pull their economies out of the corona black hole. And this move is expected to further accentuate the rally in gold, silver and other metals. Since this infusion is in addition to the trillions of dollars announced globally, especially by the US, Japan and the EU, gold and silver prices are further expected to reach newer highs in the medium to long term.

Investors are advised to invest in bullion regularly. However, one should not sell their holdings/ positions in these commodities as this upmove has still a lot of steam left.

Technical Outlook
Nifty50 closed the week higher after opening with a gap-up. This is the sixth consecutive week that Nifty closed with gains. The rally in the index is being supported by positive developments on the vaccine front and participation from some of the heavyweights from oil & gas and IT sectors.

However, all-weather partner Bank Nifty has seen a drop in momentum. The banking index has formed a Bearish Shooting Star pattern, but managed to close on a mildly positive note. The divergence between Nifty and Bank Nifty has been going on for last three weeks. We continue to maintain a cautiously bullish outlook on Nifty, with immediate support and resistance placed at 11,000 and 11,240 levels, respectively. However, a break below the 10,900 level may lead to short-term weakness.

Expectations for the Week
As the market strolls through the earnings season, it is continuously discounting surprises in results, if any, and discounting management commentaries on the irreversible impact on businesses. At least from a rhetorical point of view, tensions are increasing every day between the US and China, and India too is taking actions against Chinese business interests by overhauling internal policies to benefit domestic counterparts.

Supposedly the entire world is virtually orchestrating policies against China by imposing sanctions, slapping anti-dumping duty, incentivising industries to move out of China and so on. It seems global peace is nearing its all-time low, and equity too cannot prosper in such times.

Investors are advised to be patient and wait for a deeper correction. Nifty50 closed the week at 11,194.2, up 2.7 per cent.