Despite some sector rotation, key factors are that volumes are drying off and FII participation is waning, this may well be the calm before the storm, cautions CNBC-TV18's Udayan Mukherjee. "Chances are very high that by the time we head for expiry next week, the Nifty would be either at 6,100 or at 5,500," he says.
He feels one should watch out for today's afternoon session, the last one hour of trade today, because the markets have a habit of preempting events.
Below is the verbatim transcript of Udayan Mukherjee's analysis
If we analyse the internals of the last few days, the key one which stands out is that volumes have dipped off quite alarmingly over the last couple of days. That is not surprising ahead of fairly important events. The market has become very range bound. That also is not surprising. So I think trader activity has died down quite a bit. Also tying in with the fact that FII flows while they remain in positive terrain, they have also diminished in magnitude a little bit over the last couple of days.
There has been some sector rotation but the key things are that volumes are drying off, FII participation is waning and that tells you that this may well be the calm before the storm. We have had three very range bound kind of sessions, I don’t think it will continue like this, chances are very high that by the time we head for expiry next week, the Nifty would be either at 6,100 or at 5,500. So I think there is a good 300 point swing on either side, which is quite likely and possible depending on how the events pan out and the market has paused before these events over the last three days.
However, I would watch out for today’s afternoon session because while all of us think that the markets will pause and wait and react after the event, the markets have a habit of preempting events and therefore for right or wrong, sometimes they get it wrong but they will try and make a move just before the event. So the last one hour of trade today even if we get up to a flattish kind of stand, will be quite interesting.
On market performance today
Right now it is one of those junctures where discipline is going to be far more important for a trader than having a view. It is not your predictive ability at this point going into very important events because you could get it wrong on what the Fed says or what the RBI has to say.
It is not about being able to predict the markets correctly at this juncture which is more important, it is your discipline which is more important. So, you could have a position and most traders would still be carrying long positions because the Nifty over the last few days has not violated any typical stop losses that would have been kept by the long trader. Due to that, the positions would still be long in the market, but it is very important because we are about to see volatility pick up over the next few days quite clearly and discipline is going to be most important.
As a trader if you get your call right, you just need to pyramid your positions, add to positions if there is a breakout. If the market turns against you, you need to respect those stop losses that you have in place otherwise you could be staring at fairly deep losses or atleast wiping out of most of your profits quite immediately.
At this point you don’t want to get caught into and therefore, what the market says tomorrow will be wrong. You just say I don’t know what will happen, markets will make a big move, I just want to be sure that I don’t make a mistake at this point and get saddled into a bad position. So, it is one of those junctures where the outcome is uncertain and therefore, discipline is far more important than having a very firm view on what might happen in the next 72 hours.
On FOMC event
I was tossing around in my head what could surprise the market because these scenarios are so well defined and discussed that some people believe it will be USD 10 billion and the Fed will mitigate that by saying they will not raise interest rates for another three years or something like that. Others believe that it might be USD 15 billion, but these are black and white options that are laid out by the market and very well-known and advertised. Therefore, I am struggling to figure out what could be a big surprise which the market just gets spooked by or gets very enthused by.
Let's see how today's event goes but it is possible that the markets have factored in the outcome of this event with many global events in the last many months well ahead of the event and therefore, there might not be a big surprise after all. But there are signs of complacency that are building up in global markets and by that I don’t mean only emerging markets, even the developed markets price action.
If you look at the US equities knocking at new highs, European markets and how well they have done and there is a risk that some of these markets are getting too complacent particularly entering a time zone that has been one of great tumult for financial markets. This last week of September and the four weeks of October, if you go back in history has been a very tumultuous period for financial markets and going into that with so much strength gives you a little bit of a flutter in the stomach.
On Indian market
I do not know whether we should be talking about loose-loose situation on the back of 600-700 point Nifty rally. Market has done well, the rupee has done well so there is momentum in the market right now and there is no denying that. It is just pause for three days to soak in some of the news flow. It is possible that this event marks a turning point in the price action over the last few days but one can’t say that with any degree of certainty.
What happened yesterday was quite interesting because the stronger sector started to attract some buying again and I was waiting to see that because so far as we discussed, yesterday the rally was being led by the laggard sectors or the weaker sectors.
Yesterday, Tata Consultancy Services (TCS), HCL Technologies, Wipro, Tech Mahindra all saw buying. ITC and Lever saw buying. So it is a departure in the trend in the last few days where the stronger sectors were seeing profit taking and the weaker sectors were leading the rally but yesterday banks saw some profit taking.
Some of the midcaps, the weaker midcaps like HDIL, NHPC, Suzlon, Sintex, stocks which were leading the rally also saw some profit taking. So, what happened yesterday was quite encouraging as the money started shifting to some of the fundamentally stronger sectors and we saw profit taking in sectors which are vulnerable to a correction after their rally over the last few weeks.
I would still not rule out a bit of an extension of this rally if Ben Bernanke does not disappoint but at this point after such a big rally one will have to highlight that the risk have been quite heightened and the market could easily turn quite viciously at the first hint of bad news.
On Nifty levels
There is a fair chance that one will probably see both 6,100 or 5,500 before the month of October is out. Whether we see 6,100, will be determined over the next week or ten days, if we do not see it for the next week then 5,500 will probably be a reality.