Market not bottomed-out yet; see Nifty base at 7700-7800: JM Fin

Shah is not surprised by the strength in the US indices and expects the Dow to test 20,000 in the near-term. However, he cautions that any decline in the markets there could spell trouble for India.

He does not recommend buying information technology (IT) as there are better opportunities in the market. He expects power sector to give windfall gains in the next couple of years.

For the Bank Nifty he sees support around 18,000 and expects PSBs to outperform.

Metals, he believes could lead the next bull market, while oil & gas could be the other leader in the coming months.Below is the verbatim transcript of Gautam Shah's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.

Anuj: What are the charts indicating? Have we made a bottom and more importantly higher bottom at 8,050?

A: It is fair to say that the developments of the last one month have managed to stall the bull market proceedings and I as a technician welcome it because if you go back to levels of 8,800-8,900 in the month of September, as a technician you are concerned that the market had run up 30 percent without even 5 percent drop and we had highlighted this on the channel last time. However, now with the Nifty having dropped 12 percent from the top things are looking much better on the medium-term charts.

However, having said that from a near term perspective we are not of the believer that the market made a bottom in the month of November. I think bottom of around 7,930 was a weak bottom. This is more of a recovery that has taken place after the knee jerk reaction that we saw after the demonetisation news flow and not to forget that Nifty had lost about 700 points in about seven days and since you did not have any precedence to that particular news flow, the market was confused, it didn't know how to react and that is the reason it thought that let's just come off first and then we take a call and that is what has happened in the last three weeks and as the news has got discounted this market has tried to recover from those levels of 7,900 but as I said this move is temporary, we still do not have evidence on the charts to suggest that the market have bottomed out and we would like to believe that this rally could get capped in 8,300-8,400 zone or earlier and we could see a turnaround that takes the market back towards 7,900 and possibly into 7,700-7,800 zone where there should be a serious attempt to bottom out and possibly end this two month long correction, but this is a short-term view. However, from medium-term standpoint investors should use all dips as a buying opportunity and any move below 8,000 - from an investor's perspective should be used to buy because 2017 is going to see phase two of this bull market and therefore while the time right now might be so great but an opportunity is coming by and you should be watching the screen closely.Latha: Your thoughts on the Wall Street rally as well. It is unrelenting and almost un-correcting. What does that mean for other indices?

A: It has not meant anything for India because I do not remember the time wherein Wall Street has rallied so hard and India has underperformed. So it is a sad part. Had it been a very normal scenario wherein we did not had to deal with local event, I think India would have been one of the star performers of the last one-one-and-a-half month and that has not happened.

However, for the US market it is quite amazing that fear was sold for two years for that particular election event and now it's being used as a trump card by the same people and this move to 19,500 does not surprise us because around levels of 18,000-18,200 there was a lot of support and with things settling down there, we would like to believe that our round number target of around 20,000 should be tested in the near term but that does not mean anything for India; we are doing our own thing right now and the problem is US markets have done so well, they are looking overheated, they are looking a little extended and if those markets were to see any pullback, which is likely in the next two-four weeks - that is going to be a trouble for India because Indian markets have been in underperformance mode.

So while our US market round number targets of 20,000 and 2,300 on the S&P 500 are very much intact, I do not think that is going to impact our markets too much because we have a lower low to make in the next one month.Sonia: Tell us what that lower low is. If you believe that the Brexit low of 7,900 was not a bottom for the market. Over the next six months what are you looking at as the floor and the ceiling for the market?

A: There are two things here. When I talk of a lower low I mean the next six weeks. Whatever has to play out will play out by the last week of January and it is only because I just do not have the evidence on the short-term charts to say that Brexit low of 7,930 was a bottom and as I said earlier, we see that being challenged, we see that being broken and the Nifty could get into 7,700-7,800 area which is a huge support on the medium and long-term charts. So anything around those levels would be a good opportunity for market participants to build portfolio for 2017 and 2017 is going to be a trending year for the market and it is probably around the Budget time wherein you could see pickup in activity. I think things need to settle down in the next one-one-and-a-half months, you need to watch the results that come out in the month of January and you cannot jump the gun looking at the kind of screen that was yesterday, which might give a lot of comfort but the charts just do not do that. So a 5-7 percent decline from here is possible but if you ask me 6-12 months view, there are higher chances of the Nifty revisiting 9,000-9,500.

Anuj: For largecap IT it's a bear market that we have seen. Is that getting over?

A: It is getting over to a certain extent because a lot of these IT stocks have seen substantial damage in the last six months, there has been continuous underperformance there but just because it has lost so much ground, I wouldn't say that this is a time to buy IT because there are some of the other sectors in the market which have a much better setup. I think IT stocks will now get into a range. They might not underperform but they might not outperform as well, so they might just turn into a market performer going forward and many of these largecap IT stocks have tested medium-term, long-term supports in the last two weeks. So I would stay away from them, there is no trade right now in them whether you look at it from trading or investment perspective.

Latha: You said that you could get 7,700-7,800 kind of level in the Nifty, your lower low. What does the Bank Nifty do? Even lower than that, does it lead the move down?

A: Bank Nifty could be the troublemaker because for the last two weeks it has been in this range and it has underperformed while the Nifty has pulled back to levels of 8,250 today and on the Bank Nifty 18,000-18,200 is a very important support area and that is the level it has respected very well in the last couple of weeks. Eventually we believe that 18,000 on the Bank Nifty could break and if that happens, it will open up 5 percent decline and not to forget that in the last seven months Bank Nifty was the best mover in the market. It saw a phenomenal rally of about 40-45 percent. So if it gives back 15 percent from the top, it's very normal. So in terms of levels 17,000-17,500 is the area where I would look at and that is the point where I would look to build long positions for the next 6-12 months but within the Bank Nifty we have seen an interesting shift in the last one month, I think the public sector undertaking (PSU) banking stocks after a long time are looking much better than the private banks and I have not seen something like this on the charts for the last two-two-and-a-half years, so this shift might play out gradually over the next three-six months.Sonia: What about the pocket that has bounced back the most over the last ten days - autos and auto ancillaries. How are you positioned there and what would you recommend now if one had to buy. Would it still be the frontline auto names or is there better value now in auto ancillaries, the non-index largecaps?

A: Autos have always been on top of our list and every time we have been on your channel we have talked positive about auto as a space and if you look at the last five years, if anybody did not have significant holdings in autos, you would have underperformed the market. Having said that from a near term perspective with what happened last month, on the demonetisation front, I am sure some of these stocks are looking a little confused at least from a chart's perspective and therefore I do not think these stocks will go on  to make higher highs in the near term. The next one month is going to be a testing period for some of these auto stocks wherein they might just turn range bound. So I wouldn't be very positive but at the same time I do not think there is too much downside as well but the two sectors where I am very kicked about for the next 6-12 months would be oil and gas and metals. I think metals are speaking on your channel six months back when it was trading at levels of 8,000. Today it is trading closer to 11,000 and it's probably a sector that has recovered the best in the last two weeks and even from here we are looking at 20-25 percent run up in metals. So metals is looking like a space that could potentially lead the next phase of the bull market and therefore you need to have a significant holdings there from portfolio perspective and that would be followed by oil and gas; a sector that was an underperformer for almost five years has made a stunning comeback, not only in oil marketing companies but even stocks like Oil and Natural Gas Corporation (ONGC), Cairn India even Reliance Industries which is now sustaining around Rs 1,000, I think all are very good setups and these are setups that are likely to see significant upside over the next six months. So these two spaces, I feel, are going to be the poster boys for 2017 and you need to be with the leaders and therefore you just need to be with them.

Apart from these two, power is one space that could give windfall gains for the next one year.

Anuj: You spoke about oil. This downstream versus upstream - last few years it was all about BPs and HPs and now even ONGC and Cairn are bouncing back but one of them is consumption set. Do you think both do well or do you think upstream now does better than the downstream?

A: It is a stock specific call. Unfortunately compliance does not allow me to give and elaborate view specifically, but oil marketing companies have had a phenomenal run up. So it is only fair to expect them to see a little bit of a ranged activity or consolidation going forward and therefore the underperformers of the last two years should make up for the underperformance of the oil marketing companies and therefore to answer your question the other popular names in the market should do well.

Latha: Would you bet that the midcaps could make even lower lows, they have been the outperformers this year?

A: That is an interesting question which we are still trying to answer as a technician and the reason I say this is because while we do expect the indices to make lower low, I think a lot of the panic lows that stocks saw in the month of November will not be challenged. It doesn't happen that stocks, sectors and the indices bottom out at the same time. It just does not happen that way. So I do believe that there will be pockets in the markets, the outperformers in the market will not go on to make a lower low and that would basically be your power stocks, some of the oil and gas stocks that we discussed but the other names in the market like capital goods, banking, IT, healthcare, these are the ones that will go on to make a lower low. So for the midcaps itself we already saw a lot of damage in that correction that took place in the month of November. So as a basket I do not think it will go on to make a lower low and therefore for investors this might just be a good opportunity. So if the Nifty were to cool off once again below levels of 8,000, you just have to get into good midcap mutual funds and that could give supernormal returns over the next one-three years.