Stock Market

Toxins are out in selloff; about time you do your stock picking

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Over the past one-and-a-half months, the Indian market has scared away half of its participants.

Open interests in Bank Nifty and Nifty have reduced by 40 per cent from the peak levels seen in July-August.

Additionally, the market has become super-volatile amid negative sentiments in the media, which is evident from headlines such as “Another D-Street Bloodbath sees Sensex erase 2018 gains”, “Markets plunge on global selloff”, “Diwali dhoom may elude markets amid global gloom”, “Trump and China headed for a double-barreled war.” Such negative rhetoric is ideal for bottom formation, but is keeping investors away from buying quality shares.

Bear market bottoms are formed amid such negativity.

And the precise reason why the masses do not indulge in buying shares at this point is because they pay too much attention to such headlines, which should ideally be ignored. Currently, Mr Market seems to be deeply oversold and is, therefore, ready for a bounceback.

Investors must be watchful, as it will be interesting to see if such a bounce will take the market to new highs or it simply proves to be a dead-cat bounce, which can again take the market lower. When the new week unfolds, it will give evidence as to whether stocks will fall further or not.

It looks like until the earnings season lasts, the market will maintain its upward journey and continue to inch upward with occasional volatile corrections. Event of the WeekThe rupee has taken a sudden U-turn and started appreciating, which has surprised most market participants.

When RBI didn’t raise interest rates, entire media and market participants blamed it for not supporting the rupee.

But to everyone’s surprise, the rupee didn’t fall further; in fact, it started to rise.

There is an old saying: when majority of the Street expects something, it seldom happens.

The rupee has indeed taken a turn, which will help not only the equity market, but also take the pressure off current account deficit by stabilising the macros. Technical OutlookThe Nifty50 has just fallen short of touching the psychological support at 10,000, but reversed from the 10,138 mark with a sharp bounceback.

Volatility is expected to remain high, which would make traders’ life difficult.

The bounce can reasonably retrace 50% of the entire fall, which can take back Nifty50 to 10,950 in a few weeks.

Traders should buy on dips for small risk-reward ratios and all short positions should be squared off.

Expectations for the WeekThe market has undergone a deep correction and with the earnings kicking off, stocks are expected to be very volatile.

Nonetheless, the market should rise during the earnings season.

Macros have been weak, but despite the US indices experiencing a massive fall in last two sessions, our index has ended strong on Friday. This shows that the selloff has been overdone in our market and a significant downfall is unlikely through the Q2 earnings season.

However, the IT sector is expected to see a fall on the back of higher valuations and an unlikely rise in the rupee in the coming quarters. Investors should bet on private sector banks, FMCG, consumer durables and textiles stocks, as good earnings numbers this quarter should give these stocks a lift. Nifty ended the week 1.51 per cent higher at 10,472.




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