Market will follow weak global cues today: Udayan

Udayan Mukherjee, Managing Editor CNBC TV18 expects a quiet start to trading today.

Today is the close of the trading week before the Budget. He points out that yesterday was a crunching blow to pre-Budget market expectations, as we had a dreadful trading day, with the Nifty back at 5850 levels. There were hopes on Monday and Tuesday that a pre-Budget rally might have ensued. Yesterday must have dampened those hopes. So, we're back to the grind this morning. Global cues are not great either. US and other global markets fell, triggered by a number of factors. For one, a correction seemed to be coming for quite a while, and this, coupled by fairly poor economic data, led to the fall. But with the S&P still at 1500 levels, so we can’t say that we are bottoming out for sure. Today, the primary market trend is expected to be established by the global markets. Currencies have retraced, and commodities are collapsing. The breakdown in global markets has been coming for sometime. People have been discussing the possibility of a global correction, but it somehow did not materialise. However, in last couple of days, it seems to be approaching in a synchronised manner. What could have triggered this was anybody’s guess, but sometimes when markets are extended after a multi-month rally, any excuse will do. So, yesterday, suddenly the Federal Open Market Committee (FOMC) minutes got latched on to on whether Quantitative Easing (QE) will get withdrawn prematurely, and that debate still rages overnight. Then, the Eurozone Purchasing Managers' Index (PMI) which came in was not very encouraging.  So I guess it is a combination of factors which has led the market lower. But I think these have all acted as excuses or triggers to precipitate what looked like an overdue correction. It is difficult to gauge the extent of it now. Yes, the screen for the last couple of days did not look good because currencies have retraced quite a bit; the euro and the dollar are gaining more momentum with every passing day. Commodities are collapsing around us and these are signs that there is risk off for the moment. However we have seen similar phases in the past. They turn out to be two-three day corrections, we all get very overwrought, and then the markets stabilise. So may be we should not write off the market completely but wait to see more evidence of that over the next few days on whether this is the unfolding of a much deeper correction which was long overdue. For now, the signs don’t look great and the markets will be worried and watching very cautiously. Yesterday the MSCI emerging market (EM) index closed at a seven month low and the CBOE VIX just for EMs shot up 11 percent, biggest surge it has seen all of this year. Our own market lost quite a bit of ground and it was a free fall really for the broader market. What has to be seen here is that our market has been actually moving or correcting ahead of the global markets. Now, if you look at how India or some of the other Asian markets that you alluded to have done, their corrections have started well before the S&P started correcting two days back. So, in a sense, it is like a bit of the tail whacking the dog. It is how in our market the midcaps corrected first and it is only now that the large caps are catching up. I think even in global markets where we would qualify as a midcap market, our market has actually corrected 5 percent before the US correction had set in. However, what worries me is that this might just be the start of the US correction. So today we are talking about the Nifty at 5850 and bad things happening in global markets, but the S&P is still at 1500, just 3 percent away from an all time high. If that market now starts to pull back significantly, then we cannot say that we will be bottoming out here. So, the next week or so might yet be volatile, you might get sharp pullbacks. We have a very important event for the market next Thursday (Budget), so there could be volatility. But the primary intermediate trend will be established by what is going on in the global markets and liquidity. So, we should not be under any illusion that India will do something very different from what other global markets are doing, particularly if we get caught in the vortex of some kind of a short-term volatility spiral in the global space. The index got knocked back quite a bit yesterday, now we are far away from our comfortable range.  Now, the talking point even in the case of a post Budget rally will become where the rally starts from, if indeed that materialises. So, earlier the talk in the market was about whether post-Budget the Nifty can actually move higher aided by some good news there and take out that previous peak of just above 6100. However, it depends on where the clock starts from. If the clock starts from 5800, then you are talking 300-350 points to take out the near-term peak which is a 6-7 percent kind of a rally. Considerable damage has been done to the expectations that post the Budget, the market might reassume its uptrend, take out that previous stop which we have been struggling with, and then make its move to 6250-6300 kind of levels. Right now, I think the market is more focused being defensive and seeing where the damage can get contained. I don’t think it is prudent any longer to talk about the market trading in a range. So, first you talk about 5900 to 6100. When that breaks, you start talking about 5800 to 5900. By that logic the market would forever be in a range but the range broke down a few days back, maybe last week when we started settling below 5900. Now, where this leg of the downtrend stops, from where will you get a meaningful pullback, does that coincide with the Budget, is all in the realm of conjecture. However, what has happened in the last few days would probably give the bearish traders a bit of an upper hand, Budget notwithstanding, though they might want to reconsider their shorts just going into the event. So, though this is not to say that this morning everybody should be short but the orientation of the market now has shifted to buying every dip, to looking at opportunities to go short on the market. Because if someone has been observing the screen for the last three-four weeks, I think there have been enough red flags which are cropping up now, suggesting that the inherent fabric of the market has weakened. This is not the same-looking screen that we had in September, October, November and December. Something seems to have changed out here so I think there is a lot of caution at the least and maybe some skepticism which should be there for the traders. However, just before the event you may want to be tactically a bit more disciplined. The Foreign Institutional Investor (FII) figure is almost entirely on account of the Shriram Transport deal. Yesterday, FIIs were not net buyers. You just had to look at the screen to figure that out, so that Rs 1200 crore buy figure is misleading. We pay a lot of attention justifiably to the FII number, but one should now start looking at the Options data little carefully because I think a lot of the story is playing out there. Even yesterday, the spike that we saw on Tuesday had a lot to do with a scramble to unwind some of the Options which were written around 5900 and 6000. If you look at the data yesterday, I think there is a lot of Call writing and that is the dominant trade in the Futures and Options market. A lot of 5900 and 6000 Call Options have been written once again with a big fall in prices of those Options. So, I think the level of comfort in writing those Options means that confidence is growing. People believe that the markets capped at 6000, and may be even at 5900 in the near term. Also, the big support trade was that 5900 Put and yesterday's ferocious unwinding of that 5900 Put as the markets settled below that tells you that a lot of the guys who are playing defense, and the bullish camp are probably just going belly up, and you could see a bit of capitulation happening at that 5900 put. So while we should look at the FII cash market figures going into the expiry next week, it is very crucial to look at what is going on in the Options market, because I think yesterday there were signs that the bearish camp probably got a bit of an upper hand over the bullish camp if the Options data is to be believed.