Sell Nifty on rally; CY13 rupee target at 60/$: Barclays

In an interview to CNBC-TV18, Dhiren Sarin, technical analyst, Barclays says unless Nifty breaks above 6,000 convincingly, the outlook on the index will remain negative and recommends investors to sell on rallies. He believes there is more downside in the market and 5550-5500 is a key level to watch out for.

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“We are bearish till about 2-3 percent lower but then we would start to look for a base. For the time being, I would suggest selling on rallies,” says Sarin in an interview to CNBC-TV18.

On the rupee weakness, Sarin believes it has seen its worst and the dollar-rupee is one of the lead sufferer in the dollar bullish charge. Sarin says his end target for the currency is 59 against the USD and suggests buying the rupee on pullback close to 57/USD.

Below is the edited transcript of Sarin’s interview to CNBC-TV18.

Q: We have had a terrible weak not just for us but other equities as well. Just to start off with India though, what is it that you see for the Nifty and Sensex now?

A: The sentiment has turned quite negative for the Nifty and Sensex but it is not just that. It is the case with most emerging market (EM)/ Asian indices. If one looks at the stock exchange of Thailand, the Philippines Composite, the Jakarta Composite as well, it has just been a snowball effect of risk reduction and profit-taking.

For the Nifty itself in particular, this has turned the outlook negative. Infact, we have been negative on it for a couple of weeks now ever since the Nifty broke down through 6,000 and 5,950 or so. There is still downside, the range has been from about 5,550-5,500 or so for the last seven-eight months, since the end of 2012. So, that remains a key level to watch. We are bearish till about 2-3 percent lower but then we would start to look for a base. For the time being, I would suggest selling on rallies.

Q: We are in the midst of a pullback rally today. To what extent could this rally extend itself where you would be looking at shorting opportunities again?

A: The rally we are seeing right now is well in-line with what we have seen with volatility picking up. If one looks at volatility around the world, across asset classes, the volatility index (VIX) for US equities has been edging higher.

Infact, that is at highest levels of the year once again. If one looks at the volatility and fixed income markets, upticking at a strong pace, volatility in EMs as well has increased quite sharply. So, the Nifty bouncing is well in-line with a pick up in volatility.

We will see erratic moves. So, we have to allow a lot of pain in either direction. I would recommend just keeping positions light here, we can allow for an upside for about half a percent or a percent higher easily but then thereafter, we would start to look to sell. The key levels where we would change our view is if the Nifty can break back above 6,000 in a meaningful way and hold onto those gains. That would suggest that sentiment is flipping a bit more positive.

Q: Do you think the worst is done for the rupee/dollar for the moment because that has also pulled back a little bit?

A: Yes, for the moment, I think the worst is done. We saw the peak just below 59/USD. Now, our end of year targets are still closer to 60/USD. We think dollar-rupee is one of the leaders in the dollar bullish charge. So, if one looks at most EM currencies, dollar/Thai baht, dollar/Taiwan, they have all edged higher but dollar/INR has just raised higher and it is again telling of the negative sentiment. Infact, the dollar/INR move even preceded the rollover in the Nifty, so this currency market is quite interesting, quite telling of what sentiment is like.

For the time being though, we think it has stopped out for now and we would look to buy on pullbacks anywhere closer to 57/USD, perhaps a little bit lower but ultimately it is still a buy-on-dips market just as Nifty is a sell on rallies.

Q: There has been a slow but steady increase on crude though. That has been one of the best performers in terms of asset classes, what kind of levels are you seeing when you look at both West Texas Intermediate (WTI) and brent crude?

A: We are not making too much of these moves and energy markets. The reason being- we are well within the range of the last two years or so. Infact, WTI crude has not even pushed up above some very nearby levels, around USD 97.50-98.20 per barrel and it is struggling to overcome that. If we do get through USD 98.20 per barrel in WTI then the next big hurdle is a very psychological level and that is USD 100 per barrel. Then we can start to see volatility pick up even in the oil markets but for now the bid is quite silent, for brent crude the range is roughly between USD 100 per barrel and USD 106 per barrel within that range we are looking to sell rallies.

Q: Give us a word on what is happening on the key markets which is the Dow and the S&P because from mid-May to now, the S&P has been volatile but in real terms lost only about 2 percent in the context of other markets having fallen 10-11 percent, what levels do you see for the S&P now?

A: What comes before the S&P in our view is US yield because that is the driving force across markets. What we have seen from the market and price action perspective is US, 10-year yields approach pretty key levels near 2.35-2.40 percent, which are the peaks of last year.

This rise in yields has choked off the S&P rally for now. The fear factor is up, the fear gage is up, the VIX is up as you mentioned. So, for the S&P500, the risks are marginally lower. The big level we are watching in the S&P500, which is the key indicator for US equities at this point even more than the Dow, is 1,600 in the S&P500. If that breaks, we can easily see another 3 percent slide more which will be quite consistent with the corrections we have seen over the last year and a half or two years.