The bulls have started taking a breather given the Nifty50s spectacular sprint in August. Reliance Industries, this heavyweight, has most likely turned the tide and correction has now set in, which will eventually encompass the entire market.
Surprisingly, the market is not pricing in the disruption that will be caused by the Sino-US trade wars and currency depreciation. Such disregard is not new and it was observed in the past too. Bear Sterns had gone belly-up in late 2007 and it was only in early 2008 that the global markets priced in the risks of exotic derivatives and spiralled down, causing the massive financial crisis.
Same facts/situations do not repeat, but principles do! Current trade wars although may not immediately impact markets, but underlying businesses no doubt are impacted and soon the changing equation will be felt in stock prices.
There is too much noise around the rupee vis-à-vis dollar touching new lows, but statistically speaking, there is not much correlation between the rupee depreciation and bear markets. E.g. between August and October 2013, rupee depreciated 17.6 per cent while Nifty rose 2.1 per cent in the same period. To look at another instance, between August and December 2011, the rupee depreciated 22.7 per cent while at the same time, Nifty fell 12.1 per cent.
This indicates that the rupee might not be a spoiler in the sustainability of the bull rally, but other factors could.
Events of the Week
After a postponement, Jet Airways finally reported a disappointing quarter with a loss of Rs 1,323 crore on account of rising fuel prices and foreign exchange losses. The company has come up with a revival plan to turn around operations by engaging in various cost-reduction initiatives, but such initiatives seldom bear fruit in an ailing industry.
The US reported best-ever growth in consumer spending this quarter and the inflation figures met the 2 per cent target for the third straight time this year. Thus, strong domestic demand, a tightening jobs market and rising inflation all point to an imminent rate hike by the Fed this September end.
Technical Outlook
The Nifty50 is losing its strength with every passing day. The same can be captured in the MACD indicator. The indicator is showing negative divergence with the price action indicating that the prices are moving higher but with lesser and lesser velocity. The upward channel trend line is also acting as a strong resistance.
Short-term traders should reverse their long positions if Nifty turns below 11,600 and medium term positional traders should exit their long positions if Nifty 50 falls below 11,400, till such time traders should enjoy the bull ride.
Expectations for the Week
Markets are expected to remain largely in the profit-booking zone. IT stocks are undoubtedly riding on the bandwagon of rupee depreciation, but in the short to medium term, they have reached overbought levels and are likely to correct soon.
However, other export-oriented industries like textiles, auto-ancillaries have still some more room left for an up move. The Indian governments rhetoric about merging PSU banks will not create short-term fireworks in the PSU banking space, but they still remain value buys for patient long-term investors.
Traders should rotate their portfolio and book profits in companies like Reliance Industries and other consumption stocks and enter stocks like SpiceJet and metal plays like Vedanta.
Nifty50 closed this week 1.06 per cent higher at 11,680.
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