Nifty pullback unlikely in next few days

Tuesday was a bad day for the market. Despite it attempting a rally, the Nifty completely fizzled out by the second half of the day and ended below 5,500. The Indian market was one of the worst performing markets of Asia and now it has turned the clock right back to September 2012 in terms of market levels says Udayan Mukherjee, managing editor, CNBC-TV18.

Below is the verbatim transcript of Mukherjee’s analysis of the market.

This morning global cues are not bad but somehow for the last few days we have not been able to derive any great energy from there. Everything looked quite awful yesterday. Volumes is one part of it. The way many of the largecap stocks started coming off- Oil and Natural Gas Corporation (ONGC), Infosys, State Bank of India (SBI), it clearly appears that there is a lot of selling which is happening from global institutions once again. So, the market almost seemed to have leadership on the breakdown and yesterday looked like a bit of a fresh breakdown after two-three days of flat lining it, it looked like consolidation. There were talks of a possible pullback and the market attempted it in the morning but then it just completely fizzled out.

The market is looking very weak because it just does not have any kind of energy on the pullbacks. The pullbacks last about two-three hours, not even two-three days these days. A lot of supply overhead is visible every time the Nifty moves up 30-40 points. So, Tuesday morning looked like it would journey back atleast to the 200-day moving average (DMA), but that did not happen. Well short of that, the rally was terminated and we closed below 5,500. So, it is increasingly looking like this very important or crucial support zone of 5,500- 5,550 is in real threat of breaking down, paving the way for significant downsides. We have been talking about the possibility of a pullback, one can still happen but the conviction in one of these playing out over the next few days is becoming thinner.

Our underperformance is not going unnoticed by global traders and investors. As they say, success has a hundred fathers, failure is an orphan. I think that adage probably holds true for India right now. When the going was good, the market was performing, we were attracting more flows. Now, it is not just a one week underperformance but about a three-four months streak of underperformance that India has been in. So, in that context, slowly people are beginning to abandon the ship and move to greener pastures elsewhere where they can see better promise of near-term performance.

The global set up is slightly different. Earlier, we would wake up in the morning and looking at the numbers think that the Dow is up and therefore it is not going to be such a bad day. However, it is the converse right now where those are competing markets for us. Therefore, we should not take great joy from the fact that the US and Japanese markets are up in the morning because that is what is taking money away from us. So, in a perverse way, maybe some underperformance from US or Japan is what we need for the people to relook at Indian market in a relative light because right now in a relative light we are coming out as very poor performers. That has been India’s problem.

The macro problems are well documented and spoken about. A lot of the near-term money chases performance. People will not tell that but that is how it works and near-term performances deserted India. When other markets are up one percent, we are down one percent. It is almost like poking a finger into that eye and saying the market is underperforming, one needs to be away from it for the moment. So, things are not going well in terms of liquidity for us. I guess we just have to grit our teeth and bear it.

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Largecap leaders are breaking down. Infosys is a glaring case over the last few days. It had a lot of energy, it was leading the CNX IT index and suddenly, the stock is down to Rs 2,750 levels. ONGC was seemingly a stronger stock, however, that also started cracking over the last day or two. Many of the banks like SBI, Axis Bank have been under a lot of strain. So, SBI getting back to those sub Rs 2,000 kind of levels is also quite alarming.

Yesterday there was a suggestion that maybe after four-five days of selling, the FII selling might abate a little bit but we got presented with the Rs 650 crore sell figure. The only interesting thing is, the Nifty has completely broken down from its 5500-5550 kind of support zone. We have had closing below 5500, so I don’t think levels per se are very important right now. After the price action of the last few days, I think the Nifty is giving signs that it will settle at a lower level eventually. Whether that level is 5200 or 5000, I don’t know but I think this zone of resistance or support has been taken out. That doesn’t mean that today we may not get a pullback rally, because yesterday looked so much like a break down that today the market might easily try and wrong foot some of the weaker hands on the short side. That may always happen but the feeling generally is that a very crucial support level has been taken out paving the way for more downside for our market. It may go in a straight line because pullbacks are not working out these days but the near-term is difficult to predict. Eventually, is the market headed lower? I think the price action from the screen is telling that eventually the Nifty will head lower. I don’t think we have seen the bottom for the year yet.

Liquidity is very difficult to call at the best of times. Somebody will say that they have seen about Rs 1,500 crore of selling from the FIIs, that’s about it for the near-term and slowly it will begin to taper down. Somebody else will say that this is the tip of the iceberg.

As India continues to perform, more and more selling will come and we will probably see a protracted period of this kind of drip poisoning or money being taken out of FIIs. It is anybody’s guess what they will do. Depending on what they do, we will figure out what happens to our market. The interesting thing on Tuesday was that domestic institutions bought about Rs 1,000 crore. I cannot imagine where mutual funds would be finding money to buy. 

If these levels are taken out, we are probably talking about a very bad stretch for the market which then upsets the apple cut for the government in many aspects and that might have some kind of repercussions on the Indian currency too. So keeping all this in mind, maybe insurance companies are trying to soak up some of the FII supply in the near-term but we know that the FII supply or FII numbers are very large. For now, maybe little bit of defence might come in, but if this continues for a whole lot longer, then it will be difficult to match by even the domestic institutions. So, technicals are difficult right now. My fingers are crossed on whether we can get away light but one worries about the fact that all of this Indian damage is happening at a time when the US market is at all time highs. If for some reason a bigger global risk-off were to come about for any reason, then where would India with its poor technicals be left?

JPMorgan is going seriously overweight on Japan because they think there is a multi-year bull run underway there. It has been coming for a while and this is a two way sword. In 2012, our fundamentals were bad but liquidity was good and we enjoyed a good run. There was no reason for the market to have re-rated on the way up in 2012 but it did that and surprised a lot of people.

Now, a lot of people believe our fundamentals will improve in the second half but we don’t have liquidity, so we had the rub of the green last year and now we have to live with the opposite side of it. I don’t set too much store with this brokerage report. They are intelligent people but they chase performance but one shouldn’t  read too much into it because if one believed that, then India was a screaming buy at 5700 as well, people were falling over themselves putting out targets for next year. So, take all these reports with a pinch of salt because of where they are coming from. Some of them will be right but many of them will be wrong.