Mkt to stay volatile; see large downside surprise: Experts

Market is expected to remain volatile all through October and through elections as well, says Pathik Gandotra, Dron Capital. He advises investors to accumulate stocks during corrections. From here on at a level of around 6000 on the Nifty, he would be circumspect. He says the trend during October will depend on earnings and what the Fed decides to do in terms of tapering. According to him, except for IT companies posting good numbers, there is not much hope from the rest of the market.

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Gandotra says the reason why the market here has shrugged whatever is happening in the US because with the government shutdown, US economy will be weakening further, which in urn will force the US Federal Reserve to postpone tapering. This will ofcourse be positive for the Indian market. But if the US defaults, then the markets will sell-off, he says. Though he doesn’t see any chances of the US defaulting.
According to him, if the US deadlock gets over and US starts paying its debt then there could be a relief rally kind of thing in the markets. Also, earnings in the US are expected to be very strong this quarter and so those indices should do reasonably okay, he adds.
Sushil Kedia, CIMB, on the other hand believes that in the medium term, there will be a slide across equities and most other assets globally and in India.
He feels as far as FMCG stocks are concerned, there is still some room for them to perform on the upside over the next week or ten days. But the broader larger trade for FMCG stocks until new highs, which looks unlikely, shows all the signs of having topped out, he says.
Despite stocks like Bajaj Auto and Axis Bank rallying last week, Kedia is not getting enticed with the pattern formations to change his view that there is going to be significantly larger downside surprise than any major upside left from what has already happened in the last two weeks. Below is the verbatim transcript of Pathik Gandotra & Sushil Kedia's interview on CNBC-TV18 Pathik Gandotra Q: This has been such a volatile market that it is so difficult to determine a trend, what do you think the trend could be for the month of October?
A: There are a couple of things which will determine the trend. The first as you correctly mentioned is the earnings. Although the earnings from IT companies will be good but from the rest of the market I don’t have much hope, so, earning might actually be pretty tepid. The second thing is obviously what the Fed does. The Fed has deferred the tapering once - it looks like it will defer it again and so that could be a positive cue.
My view is that this market will be very volatile all through October. It will be very volatile all through elections and one should use corrections to accumulate stocks. From here on at a level of around 6000 on the Nifty I would be circumspect. I would wait for corrections to buy stocks. Q: Are you surprised by the kind of complacency that we have seen over the last week or so, the way the market completely shrugged off the moves from US, the way the volatility index has come down and almost everyone is positioned towards bullishness. Does that complacency worry you a bit?
A: It does, but I think there is a reason behind it, the issue is that if the US economy starts slowing even further because of the shutdown of the government - I think that makes the Fed's role more dovish than hawkish. So, people would expect Fed to get one more reason to defer tapering, which is why I think you have seen some kind of a risk-on happening last week. It is just the very initial signs, which is why it is not selling off. The markets will sell-off if US defaults. If US defaults everything sells-off. However, that is not going to happen.
So, if US deadlock gets over and US starts paying its debt then there could be a relief rally kind of thing in the markets.
Also remember that earnings in the US are expected to be very strong this quarter and so those indices should do reasonably okay. Q: I wanted to come to you on the earnings season. You were talking about how that would be the trend determinant for our markets but is there anything in the earning season that has the potential to take the markets out of this range or will it just be volatile but by and large within that range of 5,500 on the downside to 6,100 on the upside?
A: The point is the earning season could go both ways. Expectations are very low from the earnings season, if you remember except for the IT pack, people don’t expect too much of earnings from any other sector and so even small surprises could be positive.
Having said that, on the question of the range for the market, I think the range will stick. I don’t think we are going much below 5,500, I also don’t think we are going much above 6,000-6,200 because you are in a range where to break out of those range you need structural negatives. On the negative side, the negative will not come from earnings in India and on the positive side, also maybe earnings can surprise but it is too early for that. So, for a positive surprise, you need significant gross domestic product (GDP) growth, you need significant interest rate cuts to happen for you to breakout of the range which is not happening any time soon. Negative side, you will need some real global event which could be a crash kind of thing which would make you be significantly negative otherwise you are stuck in that range. Sushil Kedia, CIMB Q: So far your theory of 4500 on the Nifty has not played out but what did you make of the week that went by and what could be the strategy for the coming week on the index?
A: 4500 is not a theory and even if it is it won't play out in one week. I am looking at about 8-10 months.
The fall that we saw initially in the prior week from those 6100 plus levels going down to where we went, I would say even till now the evidence is only so much that the move of this week is just a correction of that fall. I will need stronger evidence next week for persistence of this trend - beyond Monday into Tuesday, perhaps even on Monday you will see a down slide beginning the kind of volatility that we have seen today.
When I connect those with my larger patterns on many other charts the volatility that happened in markets in the last two days is not evidence enough for me to give up my computations of the medium term that we are going to see a slide across equities and most other assets globally and in India. Q: Last time we spoke to you, you were quite negative on IT but are you surprised by the strength in IT stocks especially given the fact that the currency has actually appreciated and along with that has come strength in IT names, some of them at lifetime highs now?
A: Do you expect that just because currency has strengthened IT stocks should be going down? It is actually not working that way and will be very shortly explaining that in the week forward. We have been working on some research on that. The IT stocks – let us for now in this discussion, I would like to focus on the patterns that are forming on the prices. The causality between the currency and the performance of IT stocks is non-existent. In fact if you ran regressions on all the 31 indices published by BSE and NSE to see which one has the smallest correlation with the INR/USD. Don’t get shocked, it is CNX-IT and the second smallest is BSE-Tech and there are reasons that we will discuss some other day.
Coming back to the point, an easier thing for this discussion, the outlook on IT stocks looking at technicals - when the longer-term trend has had been as strong as it was on IT stocks. The correction within corrections can still go back and retest those highs. So far through this week, the patterns are telling me only that. I haven’t found evidence to stand-up and say humbly, I have gone wrong and I would like to reverse my trade, no, it has not yet come. When it comes, I will surely do that. Q: What about some of these fast moving consumer goods (FMCG) names, ITC, Hindustan Unilever, they have shown some signs of correction in trade last week, what would be your approach in some of these names?
A: In the long run, technically speaking purely the tops that the stocks in this sector placed in middle of July odd, those are the long-term tops that have come in place. Markets formed a substantial dip after that and what is happening is the counter trend move to the larger trend within which last ten days odd has been a minor dip perhaps there is some space, some room for FMCG stocks to still perform on the upside over the next week or ten days but the broader larger trade for them I think until we go into new highs which looks quite unlikely the FMCG sector has all the signs of having topped out. Q: Let us talk about some of these names which did really well last week. Bajaj Auto, Axis Bank. Bajaj Auto in particular is close to lifetime highs. How would you approach some of these stocks which now have a bit of momentum?
A: The Bajaj Auto stock really spiked up on the sales numbers. When I look at the medium to the longer term pattern, it is nothing but a counter trend rally. The top in Bajaj Auto happened in January 2013 and the low in April was the first wave down. Since then it is a complex correction of this correction itself. I am not getting enticed with the pattern formations to change my view that there is going to be significantly larger downside surprise for people than any major upside still left from what has already happened in the last two weeks.
In Axis Bank the patterns there are again not so dissimilar. It had fallen like anything. So, you give space and breathing space that is what you see in markets. All the banks they have recoiled back upwards from the massive fall they had gone through and Axis Bank is just doing that. I don’t think on an investment time horizon the charts are foretelling me to change the stance, it is just one rally right now.