Aug 10, 2017 06:01 PM IST | Source: CNBC-TV18

See 5-10% correction in indices; banks to be stressed for 4-8 weeks: JM Financial

Gautam Shah of JM Financial believes that the decline in the market will be more global and India may face collateral damage

The D-Street on Thursday continued to see weak movement as benchmark indices fell in opening trade as well. The Sensex lost around 100 points in the opening tick, while the Nifty fell below the support level of 9,900.

Institutions such as JM Financial had flagged concerns regarding the overbuying in the market when the Nifty hit 10,000 and now see a meaningful correction on the cards.

“You can call it a transition phase…the Nifty could test the lower end of the target of 9,300,” Gautam Shah, Associate Director & Technical Analyst at JM Financial told CNBC-TV18 in an interview. He expects a correction of 5-10 percent from here as well.

Until now, the correction was in pockets and going forward, this could see some sort of an expansion, he added.

Further, Shah also expects the decline to be more on a global level and India could face collateral damage because of that as well.

One of the key factors that supported the market in the bullish run was the strong liquidity as inflows via mutual funds by retail investors were surging. With the risk in the market, is there a chance of these flows reducing? Shah is wary of that and is unsure of what will drive the market if liquidity dries out.

Among sectors, Shah expects banks to be under pressure over the next 4-8 weeks. He sees the near–term target for Nifty Bank at 23,800 and it could touch levels of 22,500-23,000 levels.

He remains unsure where the bottom for pharmaceuticals is, while the metals sector is the only place to hide currently. Meanwhile, the oil and gas sector looks seriously overbought, he said, and it could see maximum weakness in the sector apart from banks. In fact, he suggests investing in gold and oil rather than equities.

Below is the verbatim transcript of the interview.

Latha: You were very enthusiastic about this rally, called it earlier than the rest. Now it is seeing its first serious jitter, the one after the November 10 to November 18 this is the first serious we have seen and even then it is all of 2 percent fall from the highs. Where may it find its feet?

A: The last time when we were on your channel, that was the time wherein we were celebrating 10,000 on the Nifty and that was also the time when we presented our first cautious/negative view on the market in the last seven months because I think the last two weeks has clearly been a transition phase at the markets. You had a scenario where in the Nifty and the Bank Nifty tested their targets of 10,000-10,100, Bank Nifty had done its target of 25,000 and once that happened, for the first time in seven months you had many evidences on the charts to suggest that the bulls are gradually losing control.

It is always the case that the studies give you the first indication and then the price action follows suit and that is really what has happened in the last couple of weeks. We call it a transition phase wherein the bulls gradually lost control, and the bears very quietly got into the screen. As the Nifty broke that important support area of 10,000-10,050, the bears have taken complete control. I would like to believe that the texture of this correction is not something that we have seen in the last seven to eight months, the momentum on the downside is much greater, and the participation has been widespread. If you notice in the past whenever there has been a correction, it has always been in pockets, but this time you are seeing the midcaps and the largecaps fall at the same time. So in that sense it is different.

The fact that India VIX is looking very excited, in all previous corrections, you never saw the India VIX doing anything, but not it has got back to that level of 13 and it is actually threatening to go to levels of 15-16. So, given all of these factors, and when I look at the chart setup, I would like to believe that this is a meaningful correction, this is not going to end in acute, shallow manner which we have been used to in the last six to seven months and that is probably the reason one should not jump the gun in entering the market even at current levels because as you rightly pointed out, we have just lost about 2 percent from the top and if this is a meaningful correction of anywhere between 5-10 percent, then I think over the next couple of months, you could actually see the Nifty go down to the zone of 9,300-9,500 and around those levels we start to look for a bottom.

However, just for the extreme short term, I think since we are slightly oversold, I think 9,700 is an area where the bulls might try to protect that particular mark. So, near term I think a drop to 9,700 seems likely. However, over the slightly longer term, I think there is much more downside and the market seems to have created a cap around the 10,050-10,100 area, so, I don’t see that getting violated. So, yes, net-net, I think it is going to get a lot more uglier before it actually gets better.

Anuj: Last series low was 9,450 and we had a one way rally from there. Are you saying that we need to give all of that up, at least the last round of big rally?

A: All of that and more. As I said, the lower end of my target on the downside is about 9,300. So that is probably a level we could test over the next couple of months which is significant downside given the fact that we are today at 9,850-9,900. I think the decline is going to be more global. So far in the last four or five days, it has been more of a standalone kind of a fall that has taken place, bulls have gone into a shell; pun intended, and I don’t think they are going to come out anytime soon. However, going forward, I think you are going to see a scenario wherein India might have to face collateral damage because many world equity markets are on the edge of a cliff and we are looking at substantial decline in many of these popular world equity markets – US, Europe, rest of Asia. I think if that happens, Indian markets will be forced to correct about 5-7 percent from here.

Anyway I think it has all been the liquidity angle, so, if global markets get into a sort of a turmoil, which is our view, then the liquidity is going to dry up and I don’t know what can then really hold this market up. Also another point, the stronger players, the foreign institutional investors (FIIs), they have been on the shorting side for the last 10-15 days. They were on the receiving side as the Nifty moved from 9,800 to 10,100 and now I think they are aggressively on the short side. So, that also tells you that unless things stabilise at a particular level, the markets are likely to head lower.

Reema: According to you, which charts are looking the weakest at these levels?

A: I think it is going to be the Bank Nifty, it is going to be the banks. It is the pied piper sector, it always takes the market up and down. If you look at the last seven to eight months, the Bank Nifty moved from 17,500 to 25,000 without a blip. This is how midcaps and smallcaps behave. Yes we all enjoyed, we called it, we ourselves had a target of 25,000, but beyond a point it gets dangerous. So, any index, any frontline index, when it moves in such a manner without a meaningful correction, it really calls for extension on the downside. So, that is probably the reason we see the banks getting hammered over the next six to eight weeks.

We have a near term target of about 23,800 for the Bank Nifty, but overall I think we see the Bank Nifty going down to as low as 22,500-23,000. So, if that happens, obviously the Nifty is going to go down with it. So banks are right on top of our list on the sell side and this would be followed by the oil and gas stocks and the capital goods stocks which have also seen a substantial run up and these are high beta names that typically fall with the overall market.

Latha: What is the place to hide, which will be the outperformer even in the fall?

A: This is a question that we have tried to answer to our clients in the last one week, and unfortunately you have a scenario wherein IT, pharmaceutical, FMCG, the usual places to hide, they are not doing well. Pharmaceutical has been smashed; I think I am a little surprised that the pharmaceutical space has come down to as low as the May low and still it is threatening to break that. So, I am not sure where the bottom is going to be for some of these pharmaceutical companies. FMCG has lost its sheen, it has just gone into hibernation post implementation of Goods and Services Tax (GST) and the IT index has been in that 10,000-11,000 band.

So, aside of these three sectors, the only place where you could hide is metals. I think that is still an index which has an upside target of about 14,000 on the BSE Metals. So that is a target that we expect. It is not going to happen in a hurry because in a weak market environment what you could expect is that the metals might just turn sideways. So, it might not fall as much as the other sectors. So, if at all you are looking at a place to hide, it has to be metals. However, I am of the opinion that this is going to be more of a global decline. So, you might as well hide into gold and oil, and not look at equities at all.

Anuj: Last time you were here, you spoke about Reliance Industries leading this market. Can we see profit taking there as well, we have seen multi-year highs on that stock?

A: Cannot speak about specific stocks, but we have been bullish on the oil and gas space right from the time when it was trading at levels of 10,000. From there the oil and gas index has tested target of about 15,000 a couple of days back and it is looking seriously overbought.

So, some of these popular oil and gas stocks which have run up 30-40 percent in the last 6-12 months, I think are likely to lose anywhere between 10-12 percent over the next couple of months. So, yes, we would be negative on the space and as I said earlier, after banks, this is probably the space where we see maximum weakness.

Latha: You said gold and oil, not bonds?

A: Bonds are not so exciting for an equity market guy who wants to see prices moving substantially every day. However, I think gold seems to be ending a multi-year corrective phase and given all the geopolitical issues that we are dealing with right now, I think that is one chart which is telling you that there is something seriously wrong somewhere. So, you just want to be a little careful on that account.

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