Global cues mixed; Nifty may see pullback in second half

This week the market is getting closer to the earnings season. The global picture is still quite confusing and the market is not giving any pullback from the recent losses. The Nifty is grinding around 5,550 as a new week of trade starts, with some hopeful signs of rebound though it is not easily apparent today, said Udayan Mukherjee, managing editor, CNBC-TV18.

Below is the verbatim transcript of Udayan Mukherjee’s comments on the market.

On global markets

There are some wrinkles in the US market but it has pulled back from the lows of the day, so that remains an exceptionally strong market. With the kind of payroll data that came out on Friday, one could understand a 200-point fall on the Dow. However, that did not happen. Those markets pulled back very smartly.

The data points in the US have been slightly discouraging given that they have been improving continuously for the last many months. But US and Japan still probably remain in their own bull markets. Japan has been in its bull market more recently and the US has been there for many quarters now. I do not know whether that should be read as good news or bad news because the global money seems to be now shifting towards US and Japan not leaving too much for emerging markets; not just in India but other emerging markets too. One can see that the under-performances are getting quite stark.

Otherwise, signals are mixed from global markets. Commodities are cracking. There is medium-term good news for India but short-term might be indicating a bit of disenchantment for general risk assets across the world, barring the US and Japan. You are seeing China beginning to sell-off quite savagely though the currencies are saying something else. The euro has not broken down and it is slowly working its way back to 1.30. So, the signs are a bit confusing, but the one overarching theme is that there is clearly not so much love for emerging markets these days and that is evident in the capital flows in this part of the world.

On Nifty

Everyone was expecting a little bit of pullback but that rebound never came. Maybe the market wanted to see the payroll data before attempting any kind of an upmove. With that out of the way and the US reaction in place, maybe today is a cleaner day for the market to make up its mind on whether there is some pullback happening at some point in the day or if the market will remain listless. So, I think there are many possibilities out here of which way the Nifty can move.

Right now, there is no great energy or momentum in the market. The key question is whether we get one of the pullbacks which every short trader might be watching out or if the market just hangs in around these levels and then goes for the south here on. It is difficult to answer that question because it’s a very short-term trading move but generally, the takeaway from last week could not have been very savoury for the market.

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It is a little unclear on how things will move from here because a lot of traders are expecting a pullback. The 5,500-5,550 level is an important support zone according to a lot of technical studies and the market has fallen 200 points in just a couple of days.

So, there are possibilities of some kind of a rebound upto 5,700. However, Friday’s price action was quite frankly disappointing because there was no impulse at all for a market to pullback. We closed the week around the 5,550 level but because the US market pulled back from the lows of the day, it is possible that the market, even if it starts flattish may attempt a pullback in the second half of the day.

Too many people are waiting to pounce on that pullback to go short once again. Hence, it is not a very high conviction pullback, but it may still come about. The boundaries of any likely pullback are difficult to map. It could be a tepid one which takes the market to the vicinity of 5,630-5,650, but not much more. It could be a slightly deeper pullback with short covering, which could take Nifty to 5,750. That would be a reasonable pullback but it is equally possible that these pullback attempts fizzle out and the market continues to drift lower and takes out the levels of 5,500-5,550 in the near-term.

Generally, the market is weak. There are no two ways about that. However, whether this downtrend can be punctuated by some pullback, particularly because the 5,500-5,550 is an important level, is a little unclear yet.

On inflows

The Foreign Institutional Investors (FIIs) are clearly bears at this point in time. The Nifty futures number everyday should convince one about that because FIIs have short Index futures worth Rs 1100 crore on Friday. Fresh shorts in Index Futures with the open interest going up is worrisome and consistently for the last three-four sessions FIIs sell figure in Index futures has been Rs 700-800 crore plus. So, in the last three-four sessions, FIIs might have piled up close to half a billion dollars of Nifty futures shorts. They clearly are trading on the short side, on the negative side of the market. What is leading to this pessimism is the fact that for three-four days on the trout, we have actually seen outflows from FIIs in the cash market.

It may just be the first time for this year as well that we have seen not such large quantum of selling but consistent selling from the FIIs. I doubt whether we have had four days on the trout of negative FII figures in 2013. So, that’s leading to the feeling that the very benign liquidity situation that we had for most of the year, barring the one odd day here or there, might have come to an end and the near-term money is probably more likely to move out. At what pace is not determinable yet than to come in. That I think is something which the FII traders are pouncing on to go short on the market.

Also, throughout the last couple of months, what had worked as a trading range for the Nifty was 5600 on the way down. That was seen as a firm support and at that level, most participants were, atleast the smart money was, very comfortable writing Put options because it was unlikely that 5600 would be taken down. But, the ferocity with which that is unwinding now, it leads you to believe that something might have changed in the psyche of traders. They no longer believe that the 5500-5600 is a strong base for the market after the price action of the last few sessions.

There is no countervailing bull force even the domestic institutions. The domestic institutions are on the sidelines because the insurance companies believe that while the government may have paused for the moment with its offerings, it is just a matter of time before they bring out the next few divestment candidates and they need to be ready for that.

Also, they would not want to be selling big time in a sliding market to raise cash for some of the purchases. They are preserving their fire power at this point in time. Nowadays, the DII number, even if it is positive, is Rs 20-30 crore plus which does not cut much ice. I think the market is robbed of some domestic liquidity support at this point which is why even the small sell figure from the FII, even if it is Rs 300 crore a day, makes it seem like they were selling Rs 1,500 crore.