Matters were progressing well in the last week before some profit-taking hit and removed some of the sheen from the joys of new highs being punched out. The trigger was from overseas news, as the Dow saw two successive weeks of declines, and since this was being seen for the first time since Oct. 23 lows, it appears to be some serious profit-taking. The possibility of rate cuts not occurring in June (as had been widely believed) was probably the main trigger for the declines. The change in sentiment was also reflected by JPMorgan shares tanking despite decent results, as well as Intel. When anticipation runs ahead of markets and is not realized, it is usually a sign of a market that is due for a reaction. See Chart 1 of the Dow Futures. Assuming a high is made here, there is a possibility of a drop to 36,100 levels for a 50% retracement.
Matters were progressing well in the last week before some profit-taking hit and removed some of the sheen from the joys of new highs being punched out. The trigger was from overseas news, as the Dow saw two successive weeks of declines, and since this was being seen for the first time since Oct. 23 lows, it appears to be some serious profit-taking. The possibility of rate cuts not occurring in June (as had been widely believed) was probably the main trigger for the declines. The change in sentiment was also reflected by JPMorgan shares tanking despite decent results, as well as Intel. When anticipation runs ahead of markets and is not realized, it is usually a sign of a market that is due for a reaction. See Chart 1 of the Dow Futures. Assuming a high is made here, there is a possibility of a drop to 36,100 levels for a 50% retracement.
Will that continue to influence our markets, and will we also head lower? That becomes the question. My answer to that is a definite no. Indian markets have been outperforming most other global markets despite being considered expensive. This is also despite a looming election ahead, along with consistent selling by FPIs. What does that show? It clearly implies that Indian markets are currently not being viewed from the perspective of valuations. Rather, sentiment and liquidity flows are determining the health of this market.
Valuations are important, no doubt, but the three major factors of a trend (valuation, sentiment, and liquidity) are interdependent rather than independent. Many people tend to treat sentiments rather cavalierly and often regard liquidity as a lightweight factor. However, it is sentiment that ultimately decides how valuations shall be applied, creating the flow that determines prices. Consistent price action, in turn, influences sentiment, bringing in a new wave of liquidity. When both are performing well, people adjust valuations to suit current sentiments to justify the liquidity. This is happening currently. Everyone has now woken up to the fact that SIPs and domestic liquidity are now more than a match for FPI selling. This keeps the money flowing towards the markets, preventing declines from extending and creating a sentiment loop of positivity that indicates tremendous demand at lower levels. Added to that is the unwillingness of most long holders to let go of their positions, because strong sentiment ensures that highs are being steadily surpassed. Therefore, a combination of money flow, active buyers, and unwilling sellers is now contributing to sustaining the trend. At the same time, concern for high valuations is also preventing people from overcommitting to trends, leading to frequent pullbacks, which alleviate any fears of the market becoming overheated. Consequently, it becomes buying time again during dips, and thus, the cycle continues. The US (and other news items) play only a peripheral part in this loop. As long as sentiment remains intact and liquidity doesn’t ease, valuations will continue to take a back seat.
On the charts, this manifests as a sequence of higher tops (indicating the ongoing willingness to buy) and higher bottoms (showing that declines are quickly curtailed)—the classic signs of an uptrend. Most recently, this was reiterated back in Dec. 23 when the Nifty surged to new highs with a very decisive bullish candle for the month. Since then, the Nifty candles have been inching higher but with much smaller ranges, as traders and investors continue to respect the news flow and liquidity at varying times.
The simple rule that we have been following is the maxim of ‘break one but not two swings behind’ to track our trends. Accordingly, the current situation on the daily charts is shown in Chart 2 (daily Nifty). On the daily charts (relevant to active traders), these levels are at 22,400 and then 22,100. Corresponding levels for the weekly and monthly charts are at 21,200 / 19,000 and 19,000 / 17,000, respectively.
Also Read: Bharti Airtel, ICICI Bank Lead Gains As Seven Most Valued Firms Add Rs 59,404 Crore To Market Cap
It can be noted that the markets will have to drop quite a bit to pose any problem for investors as well as positional traders. Therefore, big declines, if they occur, will continue to be buying opportunities for such players.
Another reason why markets may not really fall is owing to the wide breadth that is visible in the current advance. In the last week, almost every sector index hit all-time new highs. Typically, when you have such widespread gains across the market, the bull market is very much alive and kicking. While there is no denying that profit-taking may emerge for the strangest of reasons, such strong breadth readings will ensure that declines remain of a profit-taking nature only. Of course, there is also the element of Q4 (as well as full-year) numbers that will be announced soon. This can hold potential for trends to be affected in certain stocks where performances turn adverse. We need to watch out for such names ahead. Equally, there should be further ramp-up in stocks that outperform the market's expectations for the quarter and the whole year. Commentaries that accompany results or analyst calls should be watched very keenly this time, and one should take pains to acquaint oneself with such commentaries because they can lay the pathway for the near future.
Bank Nifty also sent up a new all-time high after much struggle. There is talk in the market that the major selling in HDFC Bank Ltd. may have been completed. If this is proved true, it can help the leading stock stage a long-awaited rally. Once this banking 'Bahubali' gets back on its feet, it can well trigger the return of positive sentiment to private banks, which in turn, could help Bank Nifty extend its recent gains. If that were to happen, we could probably look at a target of around 51,500.
TCS Ltd. flagged off the current earnings season by springing a surprise with better numbers than anticipated by the street. If others are able to follow in the wake of TCS, then the IT index may get a boost. It remains among the sectors that are still quite shy of their all-time high. However, since it is a heavyweight index and a popular sector as far as sentiments are concerned, improvements here will be very beneficial in arbitrating the sentiments in the coming weeks. So, watch the results and commentaries of the tech stocks.
Metals were on an absolute roll, and almost all the top names have hit all-time highs. Stocks from this sector are well-patronized by traders and active investors. None of the charts of the leaders betray any weakness; therefore, we can expect that they will continue to remain in the limelight for the next week. Stocks like Vedanta Ltd. and NMDC Ltd. have more room to extend, while Hindustan Copper, suggested a few issues ago, continues to perform well.
Summing up, market trends are likely to continue. With the possibility of HDFC Bank reviving and TCS showing up with decent numbers, the result season could trigger some much-awaited positive vibes across the board. All-round progress seen in leading sectors with the power sector charged up and metals continuing to shine, etc., we retain the "buy the dip of the week" mantra for all the readers.
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