Experts see mkts trading rangebound in short-term

Ajay Bagga, CEO, Lotus Asset Management, expects the markets to trade in a broad range in the short-term. "In the short-term, we really see very rangebound volatile markets. These markets are giving bottom up opportunities. Flows are very low. Even the domestic retail mutual fund inflows have been very poor in April. We saw hardly about Rs 600 crore of net inflows in equity funds. May has been again a very poor flow month, so those have to revive before we see broader market participation. So, this is not too good an outlook for the markets for the near future. We will have to wait and watch for more data points before we really see these markets showing some direction"

Sandy Jadeja, Chief Market Strategist and Head of Global Training, ODL Securities, said global indices have had a bad week, and have fallen between 4-5%. "We are seeing a technical retracement on the upside after the correction. Many technical indicators showing downside for the near-term."

He said the long-term trend for crude remains on the upside. "It may see a short-term top if crude prices go below last week's low and can go to USD 140 per barrel. "

According to Jadeja, investors need to monitor sentiment and whether the US will see a soft landing. "June-July tends to be volatile for markets. The Dow can touch 13,000 by June-end." He feels Asian markets may rise in June, fall after that, and rally in the year-end.

Excerpts from CNBC-TV18’s exclusive interview with Sandy Jadeja and Ajay Bagga:

Q: How does the global situation look going into next week? We have had some pullbacks in many of the key markets. Does it look like the global rally has been interrupted?

Jadeja: The situation in the UK is that a lot of traders were looking at momentum greasing over the next few weeks. But on a technical basis, we often have a saying that sell in May and go away. That has certainly come into light right now. Certainly, the indices across the world from Asia across the US and UK have had a very bad week. We are talking about 4-5% decline in certain cases.

Certainly, the Asian markets, Hang Seng had a fairly sharp drop. The Nikkei had a reasonable drop at the start by about 200 points. A lot of traders were talking about 13,000 on the Dow Jones. We are almost there. But that has seen a pullback as well.

The key thing to focus on here is that, if we take a look at the intermediate to longer-term trend, we actually changed direction last October. In the last quarter of last year, we had seen the indices start a major decline. We are seeing right now in technical terms a major retracement towards the upside. So, it is not something that longer-term traders should be getting excited about. You are really looking for opportunities to take a short position in the market and that is certainly happening. We have to look at key resistance levels to see where these markets are faltering. Also keep an eye on technical indicators, such as short-term moving averages and the emergent strength of momentum indicators.

As of last week, a lot of these were starting to show signs of deterioration, which is a suggestion that the indexes were moving up. Indicators were pointing towards a downside. That is why we are seeing these sharp moves on the lower side. Certainly, oil is a lot tighter. So, in the shorter-term, we are now looking for lower movements on the downside and the intermediate-term may change over the next few weeks or so.

Q: What is your sense looking at all the macro cues and news flow which have come in this week? Can you talk about even lower levels or us still being in a bit of trading range?

Indonesia is one country, which in 2005, went for 126% cut in the subsidies. Their inflation went through the roof. But it did not lead to the derailment of their economy. Those really offer some kind of a beacon. Something has to be done on the oil prices at these levels.

One is reaching about 3.8-4% of GDP just on the fuel subsidy and added to this the fertiliser subsidy and the food subsidy. The fiscal is not looking good at all. Some remedial measures have to be done. The domestic policy environment means that one will not be able to pass it to the end users and it will probably come through as oil bonds or some kind of financial engineering. But we are reaching a dipping point as far as the oil prices are concerned. That is the biggest overhang especially on a big oil importer like India. Until that funds some resolution, I don’t think the markets can hope for some clarity.  

Q: With respect to crude, a little bit of a cool-off from USD 135 to USD 132 is seen. Do you think we have hit some kind of an intermediate top technically or is it premature to say that?

Jadeja: Crude is a very interesting market. Since 2003, I have been pointing that we should be seeing higher prices. At the time crude was trading at USD 27.5. At these levels, it is unbelievable and many people are actually saying that we cannot actually sustain these levels. But the key to remember is, what is the trend? Both the quarterly and monthly trend has been up. On a shorter-term timeframe, on the weekly and the daily, everything is pointing up. At the moment there is nothing to suggest that we should start seeing lower prices.

In my view, if you take the January low and we do a price projection, if the oil price range coming in from USD 134 to USD 137, we are pretty much at that level right now, we need to watch out for the average daily range.

We have to remember that every time we see a decline in the oil market, we haven’t barely reached even 38% decline on a Fibonacci price level. That is telling me that this market is still strong. There is talk about seeing USD 200. I don’t think that is likely to be this year. We are up 34% from the January lows anyway. But we will see some falling off.

A technical trader needs to watch out for the weekly ranges because once we break the previous week’s range, that could be the first sign that we may be seeing a short-term top. But I don’t want to be the person to say USD 134-137 is the high. I am just looking for signs of weakness and I would be happy to go the other way. At the moment, it is still trading above its 20-day moving average, wherein the strength is still pointing higher. We could see USD 140 quite easily.

Q: Will we get away close to these current levels? Do you see the possibility of going back and retesting the January and March Lows?

Bagga: A very big factor for India would be the inflation expectation. The market is factoring in a CRR hike further or maybe a repo rate hike as well, which will have its co-related impact on corporate earning expectations and could lead the markets downwards. So, for India, those domestic cues are very important now given where we are precariously placed on the inflation front.

The other big factor is how the global economy fares. There are enough predictions of a very soft landing for the US economy and a good recovery coming into Q3 and Q4. We will get clarity on that over the next 2 months and that will really form the base. But in the short term, we really see very rangebound volatile markets. But what we are really seeing is that these markets are giving bottom up opportunities. The flows are very low. Even the domestic retail mutual fund inflows have been very poor in April. We hardly saw about Rs 600 crore of net in flows in equity funds.

May has again been a very poor flow month. So, those have to revive before we see broader market participation. So, it is not too good an outlook for the markets for the near future. We will have to wait and watch for more data points before we really see these markets showing some direction.  

Q: What is your sense of the global situation now? A lot of what our market does out here is linked to what goes on in global equities. Do you see more southward movements in the Dow and S&P next week after what’s happened this week?

Jadeja: The thing to focus on is the sentiment of traders and investors out there. There is a co-relation to the global indices. But the US certainly may have a soft landing. Historically, we know that in election years, the market tends to rally. What we are seeing right now is quite healthy in my view.

If we have a 20% correction, another 12-13% rally that we have seen from this point to another 4-5% correction would be quite healthy. We could be buying at lower levels. June and July tend to be rangebound markets. Over the next few weeks, we are going to see a little bit more volatility and then we will go through a contraction phase. We may possibly see the Dow reaches just over 13,000 by the last week of June. We may see a larger degree move and that goes the same with S&P. If that happens, we may see all local markets take another rally in the next couple of weeks or so and then possibly a larger degree decline into the third quarter. Then, we are going to see an end of year rally which would probably be about 5-8%. But it won’t be last year’s highs and I don’t think we are going to take out last year’s highs. It just depends on how sharp this retracement is. We want to keep an eye on gold and oil as well. 

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