Bears reappeared on Dalal Street as the market slumped in afternoon trade, with the benchmark indices falling below crucial levels on October 28, the day monthly futures and options contracts expired. Selling was seen across sectors.
The BSE Sensex closed below 60,000, falling 1,158.63 points or 1.89 percent, to close at 59,984.70, while the Nifty50 fell 353.70 points, or 1.94 percent, to 17,857.30.
“Expiry day witnessed all-round profit booking ranging from retail facing lenders to FMCG (fast-moving consumer goods) and across metal names. Amidst all the ongoing excitement around the primary market offerings, the bulls had nothing going right for them as sectoral indices ended in the red,” said S Ranganathan, head of research at LKP securities.
Here are five factors that weighed on sentiment today:
1 Morgan Stanley downgrades India
The downgrade of Indian equities by global research house Morgan Stanley seems to be one of the reasons for the sharp sell-off in the market, especially after the market had a strong run-up, taking the market to record high levels before this current correction.
Morgan Stanley downgraded Indian equities to equal weight from overweight due to expensive valuations, and said it expects the market to consolidate ahead of potential “short-term headwinds”.
The brokerage said that while the country's key fundamentals are positive, at 24 times forward price-to-earnings, Indian equities could see some consolidation ahead of a tapering by the US Federal Reserve, a likely rate hike by India’s central bank in February and higher energy costs.
Morgan Stanley's downgrade follows similar moves by Nomura and UBS over expensive valuations.
2 Global cues
The correction in Asian markets also dented sentiment. Asian peers like China's Shanghai Composite fell 1.23 percent, while Japan's Nikkei was down 1 percent after the Bank of Japan kept the interest rate unchanged at its policy meeting.
The South Korean Kospi was down half a percent, and the Hang Seng in Hong Kong declined 0.3 percent.
European counters also corrected with Germany’s DAX and Britain’s FTSE falling 0.14 percent and 0.3 percent, respectively, at the time of publishing this copy.
3 Post-earnings mood
A mixed bag when it comes to earnings seems to be another reason forcing investors and traders to book profits on the expiry day. Most experts feel the second-quarter earnings were largely affected by inflationary pressures due to rising commodity prices (including oil and metals), hitting several companies’ margins despite price hikes.
“The September quarter earnings have been a mixed bag, so far, wherein several companies have reported margin pressure due to high commodity prices and supply-side issues. Most IT majors have already declared their numbers and the results have come largely in line with the expectations. However, they’re also facing attrition challenges,” said Ajit Mishra, vice-president, research at Religare Broking.
“In the absence of any major event, earnings would remain in focus and we recommend maintaining a positive yet cautious approach and using intermediate corrective moves to gradually accumulate quality stocks,” he added.
4 Sectoral correction
All sectors were caught in a bear trap with banks, metals and realty being the prominent losers. The Nifty Bank, Realty and Metal indices were down more than 3 percent each. The auto, FMCG, IT and pharma indices were down 1-3 percent.
The broader markets also fell quite sharply in Thursday’s trade, with the Nifty Midcap 100 and Smallcap 100 indices losing nearly 2 percent.
5 Technical View
The Nifty50 saw a long black candle kind of formation on the daily charts as it witnessed a fall of almost 400 points on an intraday basis, indicating a big downswing in the offing.
“The fall, perhaps, is hinting the resumption of the downswing on the back of a negative advance-decline ratio which decisively favoured bears as three stocks declined for every stock which rallied. Moreover, the key technical takeaway from the expiry session can be the fact that the Nifty seems to have registered a lower top at 18,342, from where it erased all the pullback gains witnessed from the lows of 17,968 levels,” said Mazhar Mohammad, chief strategist, technical research and trading advisory at Chartviewindia.in.
He feels if the Nifty50 sustains below 18,000 mark then there are higher chances that it can be heading towards 17,500, the 50-day moving average. “Strength shall not be expected unless Nifty closes above 18,200 levels,” he added.
If the bulls manage to defend 17,860 levels in the next trading session, some sideways consolidation can be expected, he said, adding that for time being traders are advised to remain neutral on the long side by avoiding a ‘buy the dip’ strategy.The volatility index also spiked to nearly 18, rising 6.4 percent. “The spike in volatility from lower zones has awakened the bears and suggests volatile cues. Now VIX needs to cool down below 15-14 zones for a smoother market ride,” said Chandan Taparia of Motilal Oswal.