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  • Jimeet Modi

    CEO, Samco Securities & StockNote
    The founder & CEO of SAMCO Securities, StockNote and the Indian Trading League Company, Modi believes that price is the most important factor in investing. He is credited with developing the AIRM (TM), an approach to screening stocks and businesses in a scientific manner. His role model is Warren Buffett.

Twilight at the end of a dark night. This market is telling you to buy

Reduce short positions and buy on dips rather than taking leveraged positions.

ET CONTRIBUTORS|
Last Updated: Mar 21, 2020, 11.19 AM IST
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This was for the first time since the Covid19 crisis that buying was witnessed.
During most part of the week gone by, the domestic equity market was under a spell of intense fear. It seemed like economic activities will halt and deliver a crushing blow to the hopes of contrarians, with the few bulls that were doing bargain hunting eventually running away after seeing deeper cuts in the market.

However, after such dark nights twilight emerges! The situation started showing some respite towards the end of the week, as selling pressure started to subside. Just like India, globally too, markets were seen finding their feet, especially in the US, where heavyweights like Apple, Alphabet and Facebook started witnessing buying interest at oversold levels.

This was for the first time since the Covid19 crisis that buying was witnessed. Additionally, India VIX has also cooled down, indicating that the fear is receding and markets are expected to stabilise slowly. The announcement of a relief package of euro 1.7 trillion by the European Union, US’ package of $1 trillion along with Fed slashing interest rates next to zero are all a part of efforts to curtail the economic impact of the Covid-19 health crisis. India, too, shall follow soon. It is expected that Mr Market will take cognizance of these measures and the moment the health concerns subside, stability would return and markets will start rallying.

Bank and NBFC stocks are a bridge to the real economy. The financial market is liquid while the real economy is illiquid. When the real economy takes a bow, financials also take a hit. At the time of demonetisation too, the market expected the economy to stand still, when names like Bajaj Finance, HDFC Bank started falling towards the last leg. Drawing inference from the DeMo times, these very same marquee names were being sold heavily during the week. This means that market may now be at the capitulation stage with strong leaders experiencing wild movements.

Event of the Week
Crude oil experienced a fall to near $20 a barrel level this week. The US has, thereafter, announced a stock-up in crude oil and plans to increase its strategic reserve levels to a maximum of 727 million barrels in the states of Louisiana and Texas. With this announcement alone, they will mop up some 77 million barrels in the coming weeks and months, thus raising crude oil demand by 20%. If the US can do such smart maneuvering to stabilise the commodity prices, it can be reasonably expected that equities too will soon find its feet.

And if Wall Street stabilises, Indian markets will fire up in no time. After all it is the FPI selling, which has damaged investor confidence and dented the portfolio values.

Technical Outlook
Nifty50 posted the biggest one-week loss after the selling climax of 2008 and is now trading well below the rising channel on the monthly charts drawn from the lows of 2008. Till now it has witnessed a drawdown of more than 30% from its all-time high made on January 23, 2020. Though the drawdown till now has been less than that of what occurred in 2008, which was more than 55% in Nifty, but the speed has been much faster comparatively and the damage has occurred on a larger structure.

Nifty index has moved too far, too fast and become deep oversold. Hence, we might witness bounces followed by selling pressure at higher levels. Traders are advised to reduce short positions and buy on dips in the cash market rather than taking leveraged positions. Weekly lows should be maintained as stop losses for long positions.

Expectation of the Week
Normally, at the time of market capitulation, majority of the people sell in panic and smart people go for value bargains. This can be observed from the current increase in cash market volumes in the frontline names, where volumes have jumped 6-7 times in last two days – signaling capitulation. Also, value buying is emerging in sectors such as FMCG, consumer discretionary and other midcap value names. Next week, we may see further buying as a result of the very same capitulation. Hence, investors should accumulate quality names which are expected to tide through difficult times. They don’t need to have deep correction to be picked up; quality and efficiency are key for a business to ensure future growth. However, there is a global risk of debt imploding at the corporate level. If that happens, then we are heading for a different kind of a long-drawn deflationary bear market not seen in the century, in which case no amount of interventions or stimuli will be able to stop the deflationary spiral from unfolding. But this is unlikely as of now, and investors should lap up quality names in FMCG, pharma, consumer durables space. Stay safe.

Nifty closed the week 12.15 per cent lower at 8,745.


(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.)
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