Mkt looking tired, look out for TCS & Dec inflation: Udayan

We start off the week on a strange note because Friday was such a mix day. We saw a huge rally - the biggest we have seen in recent years in one of the top Nifty stocks - 17 percent on Infosys. Even that was not enough to move the Nifty into the green. It was a strange day as midcaps did badly, Nifty closed in the red and nobody expected the big gush from Infosys. So, it is a tired looking market which starts off this week with Tata Consultancy Services (TCS) from the IT sector reporting today and the inflation numbers coming in as well. It is going to be an important week for the market after very sluggish close that it had on Friday.

Friday was a huge surprise. The index closed down 0.5 percent and the mid-caps were down 2 percent. At the end of the day with your eyes blindfold if you asked anybody what would the Nifty have done with Infosys up 17 percent, he would’ve said the Nifty would be 100 points up. However, it closed in the red down 2 percent in the mid-cap with a terrible breadth. This is a tired-looking market and I don’t know how it pans out from here, but this big trick has played out in Infosys and still Nifty is stuck below 6,000. So, I am wondering whether this market is bracing itself for a deeper correction. So far, the screen has not broken down, but there were signs of breakdown in many individual stocks on Friday. I think traders will be certainly very cautious as they go into this week’s trade, particularly for the broader market. Selectively, I think people might have started taking some short positions as well. So, unless something dramatic happens over the next few days – like a great inflation number today or Tata Consultancy Services (TCS) doing an encore of Infosys, only then can the Nifty go above 6,000. Otherwise, I think we are bracing ourselves for a bit of a corrective dip here.

Friday was a huge surprise. The index closed down 0.5 percent and the mid-caps were down 2 percent. At the end of the day with your eyes blindfold if you asked anybody what would the Nifty have done with Infosys up 17 percent, he would’ve said the Nifty would be 100 points up. However, it closed in the red down 2 percent in the mid-cap with a terrible breadth. This is a tired-looking market and I don’t know how it pans out from here, but this big trick has played out in Infosys and still Nifty is stuck below 6,000. So, I am wondering whether this market is bracing itself for a deeper correction. So far, the screen has not broken down, but there were signs of breakdown in many individual stocks on Friday. I think traders will be certainly very cautious as they go into this week’s trade, particularly for the broader market. Selectively, I think people might have started taking some short positions as well. So, unless something dramatic happens over the next few days – like a great inflation number today or Tata Consultancy Services (TCS) doing an encore of Infosys, only then can the Nifty go above 6,000. Otherwise, I think we are bracing ourselves for a bit of a corrective dip here.

In terms of Infosys, the technicals are most important. Now people will look at Infosys with different eyes. The technicals will come back into play including ownership factors, the short squeeze that happened on Friday. I don’t see any shorts. They must have got cleaned out on Friday, but there will be a recalibration of ownership, now that all the brokerages are falling over themselves or each other to upgrade it after a long time. There will be a little bit of an after glow. After the glow, it might probably be more technical than fundamental because fundamentally, things have played out. Infosys has played a lot of catch up on Friday. It is trading at more than 15 price-earnings (PE) already - on one quarter’s performance. So, the question that arises is, is one quarter’s performance good enough for Infosys to go back immediately to TCS valuations or does TCS still deserve a premium because it has been doing it quarter-after-quarter for the last two or three years. I would suggest the latter, but I think in the near-term, technicals might still push Infosys up another Rs 100-150, but if you do get another Rs 100-150 on Infosys, then you are talking 16 times FY14, five quarter forward and I think at that point fundamentally, optimism should be reined in. Easy money has been made or not made on Friday. The market’s focus though now, is on what’s happening outside the index. The index is struggling and consolidating, depending on whether you are bullish or bearish, around 6,000. However, it doesn’t matter really because on Friday, despite a big thrust on Infosys, the Nifty could not close above 6,000 and that’s the first sign that it is probably struggling a little bit and it is not just consolidating. Now, there are many words to describe this. Somebody will say it is consolidating before an upmove, others will say it is distributing before a correction and the third might say that it is just pausing and searching for direction. The Nifty is doing nothing, but what’s happening with the broader market is very instructive because the last few days the market has lost its breadth. One can see so many of these influential high-beta clusters, traces in point, just to mention a few names because traders look at these as trading barometers. For example JP Associates, it went upto Rs 103, and a lot of people thought it was going to Rs 120. It trades huge volumes everyday and suddenly the stock is back to Rs 93. That causes a lot more discomfort on than the Nifty moving 50 points on either side. So, I think what’s happened is that sentiment must have got little jolted over the last couple of day. It is not conclusive as a breakdown and in the past in the last few months, Nifty corrections tend to be very slow. They lose 150 points, but there is no great momentum on the way down because liquidity is quite abundant. Whether the broader market is bracing itself for a 5-10 percent kind of correction, it is something that people need to be more focused on at this point. The evidence of the last couple of days suggest that market is probably leaning towards a bit of tiredness and did not respond to the Infosys’ good news to climb higher, which is generally not the sign of a market, which is exhibiting momentum. Moreover, Index of Industrial Production (IIP) did not matter, but inflation is an important number. While people are talking about the inflation number being the defining number for the Reserve Bank of India (RBI) to move on the 29th, my own feeling with the caveat that if the number is a big surprise either side, that should not happen. The RBI has probably made up it’s mind on what it will do on 29th January and that probably is a rate cut because that’s the language it has been speaking in the last couple of meeting as it paused. The market has moved so much in one direction that the RBI will probably shock the market if it pauses on the end of January. I think that also is at the back of its mind. But there are other things around inflation, which are happening, which are also very important, like the Current Account Deficit (CAD) number, which the RBI would be taking a lot of notice of. I don’t think it is just core inflation at sub-4.5 percent and therefore rate cut follows. The deficit is a very important part of the puzzle as well and it is very limiting for the RBI in its ability to loosen monetary policy during the course of the year. So, we should keep our eye on a few macro variables and not just the Wholesale Price Index (WPI) number in determining whether and how much the RBI cuts from hereon. The bond market is pricing in a cut on the 29th for sure already.

More to come.