Stock Market

Dalal Street is seeing a Fifth Wave: Does it really augur well for the ongoing rally

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The domestic equity market witnessed a euphoric rally, albeit a fractured one, in recent times, making everyone envy about not owning largecap stocks.

Typically, this is called the Fifth Wave in terms of Elliott Wave theory, when there is a large divergence in the market breadth.

Factually, only 54 per cent of the total stocks are trading above their 200 DMAs, which is the second lowest in a decade post the 2008 top, when 52 per cent of the total stocks traded above their 200 DMAs. This further confirms the Fifth Wave theory.

Many stocks did not participate in the rally and lagged the broader market; whether these laggards will move up eventually is a big question now.

But by the time the Fifth Wave ends, majority of the laggards would have again gone south.

One should, therefore, trade in the laggards with stop losses, as this seems to be the most sensible strategy in the current situation. Some companies posted stellar numbers this week, with JSW Steel delivering 275 per cent profit growth aided by strong demand, ITC clocking a robust 10 per cent PAT growth after weak results over the past few quarters, Biocon showing strong growth at 47% and Colgate Palmolive delivering a strong bottomline growth at 39 per cent.

These quarterly numbers were key triggers for the market to touch new highs this week. Events of the Week:Hindalco’s acquisition of Aleris at about $2.6 billion was the talk of the town this week.

It might look rosy at first glance, but when you look at it closely, such high debt levels in a commodity-type business are always risky.

Similar large ticket acquisitions such as Tata Steel’s acquisition of Bhushan Steel and UPL’s acquisition of Arysta LifeScience are all highly risky investments. Investors should remain cautious and not forget that similar hype during the Sun Pharma-Ranbaxy acquisition and what happened to them post-merger. Technical OutlookThe Nifty50 has broken all resistance levels and is in a new price territory.

The movement should last unless it reverses; if the Nifty50 slips below 11,100, then it shall be a major reversal for the entire market.

But till such times, the bulls should remain long and buy on decline.

The Nifty IT index has lost its upward velocity and is, therefore, beginning to enter a corrective phase.

Traders should focus on stock-specific movements.

For buy positions, stop loss should be placed below 11,100 for capital protection. Expectations for the WeekThe third bimonthly monetary policy may do nothing to change the mood of the market next week.

This time around, interest rates are expected to remain the same given that inflation is under control and US interest rates are range-bound. The buoyancy in the market is expected to remain for some more time aided by encouraging corporate numbers, which will justify high valuations.

At this euphoric stage, investors must avoid sectors such as IT, FMCG, cyclical commodity and private sector banks for some time, as they are trading at high valuations.

One can choose to enter realty, pharma, PSU banks, cement, aviation and OMCs for a medium-term investment horizon. The Nifty50 closed the week at new highs of 11,278, up by 2.43 per cent.




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Category: Stock Market


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