Nifty is now below 15,900. Nifty Bank has slipped below 34,000. What is the way forward for the markets now?
It’s kind of a bloodbath now. What is happening to people, who are studying the charts and trying to figure out where the lows in the market are, this market has slowly fallen into oversold territory and not just in the indices today as the RSI indicators are falling below of 30, which hasn’t happened since 2020, but also in several individual stocks.
I’m talking about this bear market. What happens in a bear market is you get oversold and then the markets keep crashing even in the oversold zone, quite the opposite of what we get used to in a bull market, where prices continue to rise even when overbought. Today we are seeing quite the opposite of that and that is why we did not anticipate this market by trying to reach a bottom. That’s the first thing we had to do.
Second, we can offer objective levels and a supporting survey. We’ll try to research what the conditions are for a possible market rebound, but we’re not very clearly able to see any rebounds beyond the kind of one-to-two-day jumps we see in between when the market rebounds. is slightly oversold. This is what is happening.
In terms of resistance, we see around 16,600 as our best case scenario should the market rebound. In contrast, we are looking at the 15,400-14,800 range. We have projections around 15,450 and we will be watching if that holds in terms of the level and what the structure is there and then we will see if there should be more disadvantages.
We try to follow the drop in the indices and see how it continues to pattern and continues to arrive with new levels. In Bank Nifty today, it broke the three-day low for the first time because as Nifty fell for the past two days, Bank Nifty did not join us. In doing so, it now points towards 32,000 and then below. , up to around 30,500 as a more important support level.
What is your impression of the mid-cap side of the market? Do you think this kind of flow will tend to continue and midcaps or smallcaps will underperform? The PMS has never been bigger, but it’s big enough now. They own a big chunk of some of these mid and small cap names?
The lead indication is getting there and so if we just look at the January pattern, the Nifty didn’t make a new all-time high but the small cap index made an intra-market divergence. Over the past six months, we have seen several of these divergences where certain sector indices have reached new 52-week highs, which are not confirmed by the Nifty. So when something like this happens on a six-month horizon, we consider it a signal of either a distribution in the market or a divergence.
Several parts of the economy are not really working together and this is where the market is signaling a potential top. Now that this has happened, what we see upside down is that the small cap index has already broken the March 22 low that we really hit at the time of the Russian attacks. This is an indication that this is also going to happen to Nifty and Bank Nifty and that is what we are trying to look for.
So in a sense, the weakness in mid and small caps would continue, they give a lead indication that this fall is going to get bigger than it already is.
So what would that do? Would you stick with some of the FMCG and IT names because they’ve traditionally proven defensive or would you just wait and watch?
If you were in a larger uptrend, that would be fine. But if you find yourself in a potential bear market, the strategy would probably be to look for certain stocks or sectors that are doing well. In this type of market, stocks or sectors that can hold their own may be very limited and identifying them may not be easy. Probably the only place that can be considered defensive is the pharmacy, since medicine is something you wouldn’t think of as a demand crisis.
But what happens is that when the markets go down like that, every sector takes a hit. We’ve seen even pharmaceutical and healthcare stocks fall over the past couple of weeks so there’s very little room to hide. At this point, the only place is cash. So we can hide in cash and wait for the markets to bottom out, I don’t think there’s really anywhere we can find solace right now.
What’s your take on the metal space? Metal prices have fallen globally and metal inventories are also taking a hit. How do they show up on the charts?
There are stocks that are oversold for days and then they fall a lot more and that’s what happens with stocks like Hindalco and Nalco where they have RSIs below 20 and continue to fall from 4 to 5 % each day. So this is an outright reversal of the trend we had before, which I called the reflation trade since 2020. We had a weak dollar and rising commodity prices. Now, that trend has apparently changed.
For a long time, metal prices held up against the dollar, in fact, for much of 2021 and that ended in April. In April we saw the new high of the Nifty Metal Index and also in the US the Dow Jones Industrials and Metals Index hit a new high and the two reversed from there. What’s happening is the commodities sector is giving in to the idea that we have a rising dollar that’s not just a counter-trend bounce, which is what I was also thinking until last month , but that turns into an upward trend. It could last a bit longer and it will do the exact opposite, i.e. push commodity prices deep down.
That’s why we’re seeing all this unraveling in the metal sector. So I don’t think the metals liquidation is over. We will of course be looking for a place where they can bottom out maybe near mars or maybe a bit lower than the lows of march 2022 and we might get something like a retracement rally but when we get it also, I’m not sure we’ll get back to new highs any time soon.
There may be a rebound at some point, not right away – give it a week or two, but once we hit that low the metals could show a countertrend, a sharp rebound. But once again, it is a counter-trend that will occur. Overall, we want to stay away from the metals for three to six months before returning to them with a longer-term perspective.
Do you think if some of the quality names people have in their portfolios have corrected, they can be bought now?
It’s a good option but I wouldn’t say right away. I say we are in freefall and when you are in freefall you want things to calm down a bit more than they have right now.
Like I said, the RSI of the index falls just below 30, we’re not sure… it could go to 20, it could go to 15 if it becomes a selloff. So if you’re looking at defensives from a three to six month perspective, and we’re saying okay, we’re in a bear market and you still have to invest and be somewhere that’s falling less than the rest of the market, then probably FMCG and pharma are working.
Many MNC FMCG stocks have historically shown signs of better performance during bear markets. In fact, pharma stocks sometimes even bottom earlier than the market itself and that’s why pharma is also a good defensive. I would probably look at the pharmaceutical industry first more than anything if I had to.