Govt pep talk helps market snap 4-week losing streak; 19 stocks rose 10-30% in BSE500

Such sharp rallies are often a result of some pep talk or some relief measure which often fizzles out trapping the bulls who bought on the hopes that a new rally will begin.

The Indian market snapped a four-week losing streak to close with gains of over 1 percent. The Nifty rose 1.02 percent while the S&P BSE Sensex closed with gains of 1.25 percent for the week ended August 9.

The S&P BSE Sensex is now back above 37,000 while the Nifty also managed to reclaim 11,100 levels for the first time since July 31.

The broader market performed in line with benchmark indices as the S&P BSE Midcap index rose 0.92 percent while the S&P BSE Smallcap index closed with gains of 1.62 percent for the week ended August 9.

More than 300 stocks in the S&P BSE 500 index closed in positive while as many as 19 stocks closed with gains of 10-30 percent which included names like Jammu & Kashmir Bank, Venky’s, Apar Industries, Future Consumer, Vinati Organics, Central Bank of India, Jet Airways, and SRF among others.

In the S&P BSE Smallcap index, as many as 71 stocks rose 10-40 percent which included names like Care Ratings, Minda Industries, IFB Industries, LT Foods, Mcleod Russel, Lumax Industries, Rolta India, and Navkar Corporation among others.

The week started on a muted note but then momentum picked up after reports suggested that the government might exempt foreign investors from higher tax surcharge and could roll out measures for auto, realty, and the public utility sectors.

The hope based rally pushed the index back above 11,100 on the Nifty. Considering the fact the slump for the past four weeks, a technical bounce back was on the cards, suggest experts. Hence, investors should not put too much weight on the past two days of upward movement.

After witnessing ultra-pessimism, equities made a smart recovery pinning hopes on the government to grant relief in the form of a reduction in FPI surcharge tax which may or may not happen.

Such sharp rallies are often a result of some pep talk or some relief measure which often fizzles out trapping the bulls who bought on the hopes that a new rally will begin.

Modi further added that for the fact that Mr Market was so deeply oversold, a rally was in any case expected. So long as gold depicts strength it would be safe to conclude that people still have a lower allocation in equities, as gold and equities have an inverse correlation to each other and whenever there is less faith in equities, the Street turns towards gold as a safe haven.

Markets will react to India’s industrial output data which grew two percent in June, a three-month low, according to the Index of Industrial Production (IIP) data released by the government on August 9.

Industrial output, or factory output, is the closest approximation for measuring economic activity in the country's business landscape.

On the macro front, D-Street would also track inflation data as well as any concrete measure which come out from the government side for real estate, auto, and banking sector. On the global front, any developments on the trade war front will keep investors on the edge.

For the next week, the stocks of Auto, Real Estate, Pharma and FMCG sector could move upward. The market is waiting for the government to provide some relief for FPI surcharge and stimulus for auto sectors.

On the international front, there would be CPI & Core CPI data on August 13, Core Retail Sales, Philly Fed Manufacturing Index, and Retail Sales data on August 15.

Technical View:

Nifty reclaimed 11,100 levels for the week ended August 9 which is a positive sign but it faced selling pressure around its 200-days moving average (DMA).

On technical indicators, the MACD has now converged upward on the daily chart and also, the RSI has recovered from the oversold zone on the same chart which is now placed at 42.34 levels.

Nifty managed to hold above 11,100 levels and formed a small-bodied candle on the daily scale while bullish candle on a weekly scale which suggests that buying is visible at lower levels.

Now, till it holds above 11,000 zones it could extend its gains towards 11,180 then 11,250 zones while on the downside supports are seen at 10,950 then 10,880 levels,

MORE WILL UPDATE SOON!!

Wall Street ends down amid more trade woes, high volatility

The Dow Jones Industrial Average fell 90.75 points, or 0.34%, to 26,287.44, the S&P 500 lost 19.44 points, or 0.66%, to 2,918.65 and the Nasdaq Composite dropped 80.02 points, or 1%, to 7,959.14.

US stocks fell on Friday following renewed jitters over the US-China trade war, capping a week of trading that saw big swings and high volume.

President Donald Trump said the United States and China were pursuing trade talks but he was not ready to make a deal, fanning fears over the impact of the trade war on the global economy.

Trump also said the United States would continue to refrain from doing business with Chinese telecoms equipment giant Huawei Technologies.

The week was marked by wild swings, but indexes finished nearly flat on the week. This week’s volume on U.S. exchanges was also the biggest weekly total of the year, exceeding 41 billion shares.

On Friday, all three indexes were down more than 1% in early trading and rebounded later in the session, with the Dow briefly turning positive at one point. This left a 315-point swing between the blue-chip index’s high and low of the day.

The frequent comments on trade are “leaving investors whipsawed,” said Rick Meckler, partner, Cherry Lane Investments, a family investment office in New Vernon, New Jersey.

“As volatility has picked up, you’ve gotten more interest on the part of traders, and that in turn has led to even higher volume,” he said. “When you get moves like this and reversals, it brings a lot of high-frequency traders in and short-term traders.”

Shares of chipmakers and other tariff-sensitive technology companies fell, with the Philadelphia SE Semiconductor index .SOX down 1.8%.

The Dow Jones Industrial Average fell 90.75 points, or 0.34%, to 26,287.44, the S&P 500 lost 19.44 points, or 0.66%, to 2,918.65 and the Nasdaq Composite dropped 80.02 points, or 1%, to 7,959.14.

Shares of Amgen jumped 5.9% after news that a US judge said patents relating to the Amgen’s blockbuster rheumatoid arthritis drug Enbrel were valid, denying a challenge by Novartis AG.

Uber Technologies Inc shed 6.8% after the ride-hailing company reported a record $5.2 billion quarterly loss and revenue that fell short of Wall Street targets.

Nektar Therapeutics shares also plunged, a day after the drug developer flagged manufacturing issues with its experimental cancer drug bempeg.

Declining issues outnumbered advancing ones on the NYSE by a 1.99-to-1 ratio; on Nasdaq, a 2.07-to-1 ratio favored decliners.

The S&P 500 posted 46 new 52-week highs and nine new lows; the Nasdaq Composite recorded 56 new highs and 129 new lows.

MORE WILL UPDATE SOON!!

‘Ignore the noise’; the market cycle will bottom before the economic cycle

Although, there are various negatives around, we expect the market to make a bottom far before the shape of the economy improves because that is the nature of market cycles.

July was a tough month for the Indian stock market. The Nifty shed about 6 percent during the month, making it the worst July in 17 years for the benchmark index.

The pain was worse in broader markets as BSE Midcap and Smallcap indices fell 8.52 percent and 11.16 percent, respectively, during the month. The carnage in July also extended to the global markets as Dow Jones moved in the red despite a rate cut and dovish outlook from the US Federal Reserve.

Pessimism is hitting peak levels in the market and the economic situation is also benign. However, history has always taught us one thing that the market cycle will bottom before the economic cycle.

Despite global and domestic headwinds, we expect the market to make a bottom far before the shape of the economy improves because that is the nature of market cycles.

Markets are always ahead of the curve and as investors, we need to follow the signs the market is giving.  All is not lost and this is the time investors must cut out the noise and maintain their poise.

The trilemma of flows, negative corporate commentary and policy issues impacting markets. It’s a three-pronged problem, the FPI sell-off is what has hit markets first.

Foreign portfolio investors (FPIs) have sold stocks worth $2.5 billion. The taxation surcharge is what is being pointed out by most plaudits, but on closer examination, we realize that from pure taxation point of view, the additional surcharge should amount to something in the range of Rs 400 crore, which is a pretty insignificant amount for FPIs who have hundreds of billions of dollars under management.

In reality, it is a sentiment issue, and the sentiments have been worsened by the weak commentary given by most companies post the Q1FY19 results.

Most sectors have missed earnings estimates, baring few cement companies and select banks. Auto and consumption stocks continue to take a hit.

The market is estimating 24 percent EPS growth for the Nifty, about 70 percent of which is expected to be contributed by banks. However, the poor numbers reported by select banks, such as Yes Bank, RBL and DCB bank, has spooked the market.

Furthermore, baring cement production growth, most high-frequency indicators like auto numbers, PV sales, IIP growth, are also not encouraging.

A possible way out of this mess is if the government intervenes and cuts rates further, those rate cuts should also result in a meaningful transmission.

We already saw some small shreds of evidence of this when the State Bank of India cut FD rates. Moreover, the liquidity surplus in the banking system is nearly Rs 2 lakh crore which should also help accelerate the transmission.

The 10-Year yield is around 6-6.5 percent, while corporates are borrowing at 4 percent higher. Going forward, the corporate bond spreads have to come down.

The RBI has definitely induced liquidity into the system but it is stuck in the interbank levels, when it transitions to the corporate levels we will see some relief.

Secondly, there are talks that the government will consider giving some relief to the SEBI listed FPIs from the super-rich levy. If that goes through the sentiments will change.

The Nifty50 is finally reflecting the current economic reality.

The Nifty was still trading near all-time highs in spite of the broad-based sell-off and slowdown seen in the economy, but now some market leaders such as HDFC twins, Bajaj twins, Reliance Industries, Larsen & Toubro, and other HRITHIK stocks have also started falling.

This has created a dual impact where mid and smallcaps were anyway in a downtrend and now the large Nifty stocks have started showing weakness dragging down the headline Nifty.

Sentimentally there is no respite as all indices are in the red. The Nifty50 is so polarized that if we construct a #Nifty 40 index i.e. stripped of the top 10 cos and kept the balance 40, the Index would actually be at 9,000 levels.

The Nifty is currently trading at 11,000. Since January 2018, the top 10 market cap companies have rallied 21.4 percent whereas the remaining 40 are down 14.6 percent.

Now, the fear in the market is that the Top 10 will also join the remaining 40, so convergence will be on the downside.

Before the slump, the market was looking overvalued despite a weak economic situation. Now, the market valuation is starting to look in line with the economy.

If the fall gets arrested, the valuations would reach a level where it aligns with the economic reality and that may enable some investors to take contrarian bet on the market.

The market cycle will bottom before the economic cycle!

The collective wisdom of Mr Market is stronger than all us investors. Eventually, the market will start discounting the future and look beyond the noises of the present.

We have been falling for the past 18 months because negative news has been running amok, but markets have a mind of their own and seldom move in tandem with the economy.

Bottoming out of valuations will be the key, after a point the market will stop looking at the next couple of quarters and will start taking the next few years into account.

In hindsight, if we step back and widen our lens, we will find that there are many well run and growing businesses in our market that are available at single-digit valuations. Mr Market will take cognizance of this and when it happens the market will bottom out and turn.

Excesses on either side are unsustainable, markets have definitely outrun themselves and just like how the excessive bull run of 2017 was not sustainable on the upside, this particular sell-off will not be sustainable on the downside for long and market will have to mean revert.

How low do we go from here!

The Nifty is reaching long term Moving Average support. If one uses a 100-period moving average to track the long term trend of the Nifty, then it is clear that the market is heading down into support.

On the attached chart we can see that the 100 EMA has provided support so many times in the past that it is difficult to ignore its influence on the trends. Barring two occasions (2008 and 2011), the index never really lost this support on a sustained basis. There were marginal penetrations in 2013 and 2016 but those were reversed very swiftly.

Investment implications

The problems are partly sentimental and partly due to policy issues. However, we expect that the market will bottom out in the next 2 months, even though the economy continues to slow down.

There are many fantastic companies out there that have given meaningful corrections and are only part of temporary slowdown.

At Plus Delta Portfolios, we are using this opportunity to identify winners in this pullback. We will be buying the market once the dust settles.

We are constantly analyzing the trends and where we see earnings growth coming in the Q1FY20 results coupled with some traces of momentum in the stock we will be ready to enter.

This is an excellent opportunity for investors to build a portfolio form a 3-5 year perspective as the margin of safety is very high since we are nearing the bottom.

MORE WILL UPDATE SOON!!