How the medium term big picture looks like for the markets?

Updated: May 21, 2020

Govenrment's Rs. 20 lakh crore relief package looked more to enhance the supply chain in the longer term whereas the need of the hour was some demand push in the immediate to short term.

Indian stocks rose for a second straight day as investors believe there would be some liquidity to drive the economy forward amid gradual lifting of the lockdown. The S&P BSE SENSEX rose by 2.1% on close as on May 20, 2020, while the NIFTY 50 followed gains of similar magnitude. The rupee fell around 0.2% per dollar, while the yield on most-traded 2029 bonds witnessed a little change at 6.04%.

The Nifty 50 index may witness the levels of 8000 if key support around 8878 and 8820 is breached in the coming days with immediate support on the downside after these maybe 8360-65 to 8000 levels. This would be majority dragged down by finance stocks as markets do not express much joy to the 20 lakh crore relief package as it doesn't offer more of a short term relief. Another factor that may drag the markets down may be global cues. Below is an in-depth analysis of the same with both perspectives from the markets' point of view as well as the economic point of view and this article is gonna be a long read for the readers.

In the last few weeks, the markets (NIFTY 50) have been trading in the band of 9050 to 9450 and recently it broke out of the band on the downside with heavy volumes with the participation of a lot of sectors. The markets seem to not react to any positive news with all of the positivity building up with the economic package, there have been positive global cues, the WIX has stabilized and the prices of crude oil are rising. Despite all of these factors, the markets are finding it difficult to sustain above 9000. The immediate support of NIFTY 50 is placed at 8820-8878 and if it gets breached, we may see a downside to 8360 to 8000 levels soon.

The levels of 9240 and 9500 can act as overhead resistance on the upside and the trading range of NIFTY 50 is expected to widen in the coming few weeks.

If we look at the various sectors, the Banks have been witnessing a lot of pressure with BANK NIFTY falling around 3000 points from it's recent high and it seems that the markets may again witness a selling from 9000 levels and a breach in key support as discussed above can take the markets back to the 8000 levels in the medium term.

The relative strength analysis of different sectors showed one standout trend which can be seen in the chart of the Nifty Infrastructure vs Nifty Services Sector index.

The Nifty Infrastructure Index ended its 6-year underperformance against the Nifty Services Sector with testing the 200 EMA. The Relative Strength Index shows a bullish divergence in favor of the infrastructure gauge which started to underperform from a key economic event in India - Demonetization in the year 2008. Economically, the demand in the Infrastructure sector suddenly dipped when there was a cash crunch and since then the sector had been underperforming. With the recent governmental push for investments in this sector, we can clearly see signs of recovery in this sector.

What is the larger component of this downtrend and what are the positive factors that may defy this trend and take the markets upwards?

We had a dream bull run from 2009 to 2019 with small bear markets in between and what happened in the past few months from a technical analysis perspective is a complete retracement of that strong bull run. It has been like a gravity, while the bull was climbing and reached the hilltop, the bear pushed it into the pit and it hit bottom and came back to where it started. In terms of sectors, clearly BANKNIFTY seems the weakest with immediate targets of 17100 to 16000 or even below these levels in the medium term. This may be followed by Auto and Metal sectors which have continuously made lower tops and lower bottoms. Also, many stocks in these sectors are bottomless so another 15-20% fall in some of the topline Auto and Metal stocks wouldn't be shocking in the near term.

The key point to notice here is the performance of IT and FMCG sector stocks which in usual times have seemed like a safe haven but the current picture looks a bit scary. We have already seen what stocks like ITC, HUL, and Nestle have shown us recently by coming down in the last 3-4 weeks and all these factors suggest that the FMCG index could come down by 10-15% in the coming weeks and if that happens, it's gonna be pretty bad for the markets. Even in the IT sector, the index moved around 8x times in the last 10 years and therefore there is a lot of room on the downside.

All these sectors are looking quite weak and the only sectors that are looking a bit stronger as of now are Pharma, Chemicals, and Insurance and I guess we have been trading on these terms for the last few weeks now by making positions in these sectors. My latest video analysis over YouTube covers stocks from Pharma and Chemical sectors. You can watch the detailed analysis here:

  1. Pharma Sector - Ipca Laboratories Ltd

  2. Chemical Sector - Tata Chemicals Ltd

How do we compare the BANKNIFTY vs some of the other weaker sectors?

NIFTY BANK is clearly looking very weak. Let's look at the plot of Relative Strenght Index of BANKNIFTY/NIFTY50 below:

For the last 5 years, if we put the NIFTY BANK over NIFTY 50, it was an uptrend which carried on for the last 5 years. Every time the markets went up, it was led by the banking stocks or the BANKNIFTY which happened consistently for the last 5 years. A couple of months when the banking stocks made new highs, the relative strength chart posted above had a lower high which was a bigger picture shift that had taken place for the last 5 years. The way some of the top banks are looking at the charts and their setups show that BANKNIFTY is going to be weaker and weaker with our targets at 17100 to 16000 or even below. So, every time the markets try to pullback upwards, it is this section of the markets that will hinder the up-move. Imagine NIFTY 50 rising in full strength, I recall the dialog in the movie The Dark Knight delivered by the Joker:

This is what happens when an unstoppable force collides with an immovable object.

We are witnessing a similar type of situation. banking and finance stocks which occupy around 30-40% of the portfolio of almost every Large Cap Mutual Fund are in a lot of pressure due to fears of increasing NPAs and this if continues for a period may definitely pull NIFTY 50 downwards and even hinder any up-move in the short to medium term. If we consider the global factors and how the US market indices are trading, they may come-off laying an even more impact on the Indian markets.

How certain big banking and finance sector stocks are likely to behave?

Bajaj Finance had been a poster boy for the last few years and people believed it to be an invincible stock, however, it has been performing very poorly even in times of NIFTY 50 gains. If the level of 1950 gets violated on the downside on a closing basis i.e. stock closes below 1950 then we can see a further downside of 15-20%. The next couple of days are very crucial for Bajaj Finance, if it sustains the level of 1950, it can see a quick rebound however it may not be able to sustain on the rebounds as the bigger picture on the market seems negative.

Coming to HDFC Bank, it is overbought a bit at the moment and still looks weak on the daily chart. In comparison to the rise it has seen in the past 10 years, it's a downfall in the past few months has been very low and hence it opens up further downside gap which is the scary part for the stock. Indications on the weekly and monthly charts show that it may go further down and test the March lows or maybe even break it by a wide margin. When you have HDFC and HDFC Bank valued at such low levels, your belief on the BANKNIFTY and NIFTY automatically shift towards the downside.

In stocks like Reliance and Bharti Airtel, the setups look strong and there is a buying opportunity at every dip. These may continue to outperform the markets.

Seeing the recent investments and dip or 13-14% from higher levels, what can we expect from Reliance Industries?

If you look at the daily charts of Reliance, you will understand that a V-shaped recovery till the levels of 1600-1650. There was strong resistance at these levels and it is very normal for such stock to take a pullback. Investors may accumulate on any buying opportunity in especially in the support zone of 1350-1380. Even from the longer timeframe perspective of 6-9 months, this seems like a good option to effectively enhance your portfolio.

Globally, NASDAQ is the most important index to watch currently. Why?

NASDAQ has been performing quite phenomenally and it is just about 8-10% down from the highs of march when it completely recovered the entire COVID-19 fall. It has outperformed the Dow Jones Industrial Average, the S&P 500, Russell 500 and all other indices. Some of its giant stocks like Apple and Google have performed incredibly well. Even the US markets are in a bearish phase after the last 10-year bull run and the NASDAQ index is currently at a very important level. Technically, there is Triple Negative Divergence, a gap that has been filled and the changes of the NASDAQ index reversing from this point is quite high. It has been seen in the past that whenever the NASDAQ index starts to correct or underperform, the entire equity basket of the world seems different. Even on the Dow Jones index, the 27400 levels have been respected quite a few times and the chances of falling from this level are quite high.

How do we expect the prices of Gold to behave in the coming future?

In the near term, Gold again looks extremely bullish after coming back from a 5-year consolidation phase and the manner it is showing an uptrend, Gold can touch the levels of $1800 or even lifetime highs of $1900-1920 seeing the current markets when investing in precious metals looks like a safe haven for investors. It has been showing a copybook or an ideal chart in terms of an uptrend. One should top up to 15% of their portfolio and every dip on gold is a buying opportunity.

#investing #stockmarketoutlook #marketreport

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