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Market approaching an intermediate top: Conserve cash, stay on sidelines

July can deliver a negative surprise and can trigger a decent fall in stocks.

ET CONTRIBUTORS|
Last Updated: Jun 27, 2020, 11.02 AM IST
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Though the trend is upward now, we expect the upside ahead to remain limited.
During the week gone by, the domestic equity market had a reality check and cracked, but thereafter it recovered mildly on the back of buying by foreign institutional investors at lower prices. Most of the sectors have exhausted their bull power, especially the pharma sector, wherein a barrage of fundamental triggers like launch of Covid-19 drugs in India by Glenmark Pharma and Cipla as well as other relaxations in export restrictions are now unable to take the stocks higher.

Therefore, the corollary is that all the buyers have almost exhausted their power and the sector is heading for a long-drawn consolidation. Additionally, if earnings for the coming quarter do not come in line with the swift rally, this sector may see cracks in prices. It is also expected that the government and RBI might again come out with measures to revive the sluggish economy, which would hopefully keep the bulls in high spirits, but this may not result in higher stock prices.

Global events have been fearful at times, but at other times it seems like they are only political posturing with nothing substantial at the ground level to damage global economic prospects. But fingers are crossed on this front!

Surprisingly, the IMF also commented that financial markets are not aligned with realities and financial assets can correct by around 10%. Other international agencies have also revised growth targets, expecting a further cut in growth prospects of the Indian economy due to the painful impact of the strict lockdown. Given the quantum of helicopter money printed by the US, gold looks better poised to deliver positive returns. Investors are advised to allocate some (10-20%) portion of their assets to gold at least for next 3-5 years.

Event of the Week
Petrol and diesel prices have been rising continuously since last few weeks. What comes as the biggest shock is that diesel and petrol prices have more or less become equal, which is a big negative for freight and transport sectors that are already struggling to find enough load to get trucks back on the road and are struggling with shortage of drivers. The second is the deep cascading effect on the entire economy. Higher transportation costs would result in higher inflation, which might impede RBI’s ability to reduce interest rates, and thereby distort consumption.

This would impact consumption, as higher inflation and lower returns on savings would reduce purchasing power affecting the much-needed demand revival of our crippled economy. This is not a good sign!

Technical Outlook
After rallying almost 38 per cent from the lows, Nifty50 has formed a Spinning Top candlestick pattern, indicating a moment of indecisiveness. The index seems to be facing a major hurdle at 10,550 level, as it coincides with the 61.8% Fibonacci retracement of the fall from the top to the recent bottom.

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Though the trend is upward now, we expect the upside ahead to remain limited and test the lower end of the channel drawn from the bottom, which comes at 9,700 level.

Expectations for the Week
Statistical evidence suggest monthly expiries have sometimes registered intermediate tops and bottoms. July expiry is expected to begin with lower short interests and, therefore, the velocity of the up-move seen in May and June may not sustain in July. In fact, July can deliver a negative surprise and can trigger a decent fall in stocks, if no fresh delivery-based buying emerges. The markets are still going to be significantly influenced by updates on the India-Sino standoff and US-Sino trade talks.

While these influences might only be sentimental, if FPIs start selling, the markets can really fall from the cliff as they have already bounced back 38 per cent, which is a good number statistically for the market to start drifting lower. All the positives, if any, are discounted. However any negative surprise may take the market lower.

Investors are advised to be cautious, conserve cash and wait on the sidelines. Nifty50 closed the week 1.35 per cent higher at 10,383.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)
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