Nifty Honeymoon Period Over: This week was one for the record books. We saw the largest range for a day after about nearly two years. The last time around when the Nifty dropped more than 5% (and Bank Nifty 6%) was back in March 2020.
Since the market had moved much higher since then, everyone had almost forgotten what it is like to go through a 5% decline in a day. Stocks get smashed and traders and investors go numb. In the 2020 round, we were hit by Covid-19 and that threatened to visit every house. Hence the decline continued for about a week more before bottoming. This time around, however, the source is far away and somewhat unrelated—except for what it will do to oil and gas prices—and therefore the very next day we had a gap-up move.
There are always signals. But the signals actually get defined by the context in which they occur. Even though prices traded up on the very next day, there were no willing buyers at higher levels so that implies there’s still some hesitation among traders.
No doubt, the bias was down.But looking at the intraday chart we can see that it was a bit of a roller coaster ride for the week. The gap took the wind out of everyone and a drop to near 16,000 also destroyed complacence. The first chart, as usual, shows the week’s action.
The breadth reading went to such an extreme on Thursday that it was a fair chance that a temporary bottom at least would have been in place. On Friday, fresh buying actually occurred as most traders were denuded of their positions and had room to create fresh ones.
Last week’s column was quite pointed in that we needed to be on the alert for declines and we got signals on that right at the start of the week. So, ideally, traders should have reduced or squared their longs. It would have been tough to get into shorts because the pace was slow, but the rally to fill the gap of Tuesday offered the best shot at creating shorts. The reward for the shorts on Thursday was much more than many had expected.
With the VIX shooting up, the sentiment was deep into fear zone. The second chart shows India VIX. We had been looking at this one earlier and waiting for it to recede but instead, we have a spike in values.
As is evident in the weekly chart of the VIX, the spike carried to a one-year high in values. Typically, unwinding from here takes a while. So some ranging action can be expected if the downside momentum ceases.
The sentiment damage took a toll on the futures long positions of the high networth individuals (HNI) group. Data shows that it is down by over 30% at the expiry. Interesting, however, to see that foreign portfolio investors (FPIs) were building long SSF contracts. That is unusual and needs to be watched. The overall open interest has certainly been cooling off from the highest levels reached in the December series.
There are many questions now in the minds of people. Foremost, is the decline over? To answer that one has to state that the prices fell into a cluster support zone near 16,240 and this also happened on a cycle turn date. Hence we can take the low as being a reasonably good one.
Measured moves would suggest a continuation of declines till 15,800 levels or so where the next set of clusters is present.
The Nifty 50 has broken the 200-day exponential moving average and that has got a lot of people jittery. The small and midcap indices also fell sharply and as we have discussed in earlier columns, the long-term support trend lines in all of them have broken too. Thus the pattern is suggestive of some lower levels to be reached. The fact that the down move was well accompanied by momentum adds to the possibility of continuation. Since the market rallied nicely on Friday, there is sufficient room on the downside and therefore continued caution is warranted.
The next question would be whether we can rally nicely if we hit good support zones beneath. The answer to that would be in the negative. First, the sentiment is damaged. Second, FPI selling doesn’t seem to stop so supply is consistent. Third, with the sharp drop, almost everyone is caught with a loss-making portfolio, so fresh money would be slower to come. Then is the fact that among the Nifty constituents, we have banks and IT in a slump with auto and FMCG also receding. Reliance Industries has hit a plateau. These constitute the major share of weightage on the index. If these are not going to fire actively, then the chances of a strong rally are difficult. The rest of the stocks don’t really pack the power to push up the Nifty very much.
The other reason is based on something that I had written at the beginning of the year. I had stated back then that if the low of December is broken then chances are that the market may remain ranged to down biased for the balance of the year. I would now expect this scenario to play out.We will surely have an oversold bounce from the current fall but it is unlikely to carry much beyond 17,500-18,000 levels for the rest of the year. So no new high in 2022 – is what it is shaping up for.
That is not to mean that the market will not have opportunities. The mantle may be taken up by quality small- and mid-cap stocks ahead. Thus it will become a stock pickers market for the rest of the year. So themes and stories are what we may have to be on the alert for. New winners may emerge. The Life Insurance Corp. of India IPO will suck liquidity out and buyers may become a lot more selective. Many stocks that have dropped an average of 30% from October in the recent fall could cease declining but may not really rally like they were doing earlier. Thus we may have to ferret out new winners.
Two years running we all had a good time and all we had to do to make money was to ensure that we were on board the train. Now we may have to work for our profits in the months ahead. All good things do come to an end. The Covid bull phase ended in October 2021. All of us were hoping that it would right itself. But the market seems to have a slightly different idea.
Finally, a quizzical note to end on. There is evidence that can be seen in two ways.
The Nifty chart shows that the retracement of the entire 2020-21 rise has yet not even pulled back 23.6%, something that is the bare minimum that occurs during a reaction.
One can state that if the corrections (three legs visible in it) cannot even produce a pullback to 23.6% retracement, then the trend is too strong and substantial new advances can occur. This is the bullish view.
The other way of looking at it would be that, a two-year drive would need much more correction (more like 38.2% or even 50% retracement) and thus this fall is just part of a bigger correction. This would be the bearish view. There are many takers for this, especially those that are valuations-oriented. After all, the Nifty rose 146% in 82 weeks and has fallen just 12.5% from the high in 18 weeks.
For the bullish scenario to play out, many elements have to come together – fund flow, FPI easing off their selling, growth in earnings, big capex from the govt, global markets getting back into action, etc.. For the latter scenario, even the absence of these positives would be sufficient to produce continued drift. So, we know what to watch out for ahead. Let’s build the scenario as data unfolds into the future.
For the immediate future, rallies may find it tough to go beyond 17,000-17,200 levels and if seen, can be used to exit from some unfavourable positions. If dips were to continue then the 15,900-zone would be where one can attempt a buy for a rally.
Source: Bloomberg
