More pain seen in second liners; midcap index may fall 20%: Pros

Even though share prices have seen a bruising decline since the beginning of the calendar, there could be more pain in store, especially in midcap and small shares, say market experts Gautam Shah of JM Financial and Atul Suri.In an interview to CNBC-TV18, Suri says 12,000 is a critical technical level for the CNX Midcap index. After holding above that level for a long time, the index has slipped during the recent sell off.Suri says technical charts indicate that the index could slide all the way to 10,000 in the short term. And while the downside in the Nifty may not be as severe, there could be a rub off effect of the downtrend, Suri says.  Shah says midcaps have outperformed the Nifty since last March when the market peaked out. While this is a rare event (midcaps doing better than largecaps in a downtrend), it is also a matter of concern, as it indicates that the market has room to fall further.Below is the transcript of Atul Suri & Gautam Shah’s interview with Udayan Mukherjee.Q: What is the Nifty Prognosis after the kind of damage that you have seen since the start of this year?Suri: We kind of topped out at 9199 sometime in March 2015 and thought we would go to 10000 plus but subsequently we noted that the market has started making lower tops which is a very simple way of looking that things are kind of topping out and over the months in the technical terms we saw creation of a pattern which is called shoulder head shoulder which had a neckline at 8000. So, the target for this kind of pattern was set at around 6900 which incidentally we kind of hit on Friday. So, really this script was written and we had kind of met our target.The question that comes up for a trader is really do I go in and go long right now or if I am sitting at some sort of cash as an investor do I really go and invest. Purely looking at the Nifty maybe it is an interesting point. Maybe it is kind of a floor that is there but when I look broader, when I look at global markets I really don't think we are there and 2008 has taught us that it is a little foolhardy to think that we will buck global trends. So when I look at something broader like let us say FTSE–the world index, which is like 47 countries, 7,400 stocks, developing markets, developed markets, I do notice that even those markets have made similar patterns. It is kind of a global sell-off and they still have to meet their targets. So, I won’t be surprised that you may continue to see global weakness. Yes, you do see short covering bounces like we saw on Monday, but I do think that global markets will have to go through some more pain.Therefore, as I said I don’t think this is going to be a massive damage or a massive cut but is there time enough to go there and buy? Yes, if you are a long-term investor etc and you do it stage wise, it makes sense but for a trader there has to be confirmation, there has to be some sort of base building that has to happen. Market will not just go up vertically; there will be some base building, they will pull up, it will retest lows or something like and start making higher bottoms and that is when I would be more comfortable to sort of look at the markets. So, standalone the Nifty, I feel has met its target. However, globally charts are not so impressive.More so for India, if you look at, the biggest villain has been the foreign institutional investors (FII) sale figure. If you look further you have the Morgan Stanley Capital International (MSCI) emerging market index which is very much as to what is happening in our space and why this sell figure has been coming and that has been a pretty weak spot, in fact the weakest global spot has been the emerging market index. India is a subset of that and that is why you are seeing this consistent selling.On Monday in spite of such a good Nifty day, probably one of the best days of the years you still see a very big sale figure. I think that the foreigners are not going to stop selling. The whole emerging bucket basket market has little more to go. Yes, some will get relatively less affected some will get more affected. India will get less affected because as I said based on charts we have hit. However, it is too early to just go in and put your money all in. To be all in, in this trade there has to be base building and base building also is important because it helps us to identify sectors and stocks which hopefully would lead the next rally. So, I feel it is time to look at market closely, identify stocks, identify sectors and look for a higher bottoming formation. Looking for a basing formation, a higher bottom-higher top is something that will really convince me that we are somewhere there.Q: Come in on this, last time I read your comments, you were fairly constructive on the market. Have you changed your view since then? Does it look this is a different kind of a market that we are living in today?Shah: Yes, it does look like and I think India really joined the herd in the month of January. The way we see it 2016 is going to be a tricky and challenging year for equity markets. If you really map the price action from last February to this February, you will notice that while the market has seen pullback rallies of 400-500 points from time-to-time, we have still broadly made lower tops and lower bottoms quite consistently.I think till about December last year we were holding the view that may be India will standout even if global markets were to correct and for about six months Indian market did standout and we did see a lot of outperformance because the market kept rebounding from that level of 7500. However, when that level broke in the first week of January that was a sort of an indication that the Indian market has joined the global herd and thereafter we have just moved in tandem.The fashion in which some of the important supports have been broken in the last few weeks, initially 7500 and then 7150-7200 is a sort of an indication that clearly markets are in for the downside. I have a few concerns right now and that concern is not visible on the Sensex and on the Nifty charts because you have a market which has been in a downtrend for the last one year, I still do not want to call it a bear market because while the Nifty has lost more than 20 percent from the top, the midcap Index has still not done even 20 percent and it has actually outperformed the mainline Indices. This is very rare. If you look at the history of Indian markets for the last 10-20 years, rarely have you seen a major downtrend with the midcaps actually outperforming the larger one. So, that is something which tells you that this might be very different to 2008.Having said that from a near term perspective the way the midcap Index is shaping up, the way the Nifty junior is shaping up, I think that gives us a little bit of a concern because those charts have only seen a breakdown in the last two weeks and they are pointing out to 10-12 percent drop from current levels. However, if that were to play out then the Sensex and Nifty will have to move in tandem. Maybe the damage will not be as large as some of the other sectors in the market but there could be more downside and I remain quite worried about the way some of the global charts are placed at this point of time. Q: What are your thoughts on this because through 2015 what we heard was a common refrain from a lot of investors that the Nifty is down and Sensex is down but our portfolios are not looking that bad. So, individual stocks have given returns. Do you see that changing around in 2016 with a lot more pain inflicted on portfolios? What for example are these broader indices like the CNX midcap index or the CNX 500 telling you now?Suri: If look at this CNX midcap 100 you will notice that through all of 2015, on the frontline index there was lot of pain this thing kind of trended between 12,000 and 14,000 kind of range. It held out very well. We were all very smug that our portfolios are holding out.Now 12,000 becomes a very important level, technically and just as you know we had breakdowns below 8,000 for the Nifty and it got pretty nasty after that, the level is around 12,000 for CNX Nifty 100 and we are just below that.Essentially, the breakdowns in the midcap index have happened very recently maybe just a week or ten days ago, so the risk that we run is that even though we may not see much damage in the frontline Nifty or the larger caps, we could see this kind of damage that is happening. If we really compute from around, we could see almost a fall to around 10,000 on the CNX midcap and that I think will be the pain point -- it is not that people have not been feeling the pain; they have been feeling the pain already but that is when you will really see even the delivery based investors throwing in the towel, so we are at that point.As I said the silver lining for me is that probably the Nifty per se will kind of hold out and the impact or the fall would be less but individual stocks are prone to some sort of accidents and things like that and we are seeing that in the pharmaceutical space, which I thought was one of the finest sector trends that we have been seeing in many years. You do see that stocks in a week loose 20-25 percent. So, that is a kind of a risk. We run that risk of accidents so that is why I feel that it is going to be very important to see not just stocks that fall but actually stocks that hold out because this is also a time for us to analyse and sort of keep our antennas up and look that in case markets turn, in case post correction how things are, what are the stocks that have behaved themselves well. We are in that phase. However, for me personally, I am looking out for those kind of stocks which do not fall or which are holding out very well or which are seeing that kind of buying because very often I have seen especially in 2008 that they have been the leaders of next rally.I know it is too early to talk about that but I guess you have to be one step ahead. Midcaps are looking wishy-washy but I for one would look for those which are holding out because I know that they could be the next winners of the next run.Q: What is your downside target for the Nifty? Both of you seem to be saying that there is some downside but not a huge amount of downside. So, there was some talk when the market broke down a few weeks back that we could be going all the way back to retest the previous top of the market which was 6,300 Nifty. What probability would you assign to that?Shah: That would really be the worst case for 2016 because I still feel that Indian markets should be an outperformer. I still have a half glass full approach for the Indian markets if I take a three year or five year view. So, in that sense 2016 might just be a great opportunity for investors to gradually get in. At any point of time - 6,870 or 6,900 where we tested last week, if that were to get broken, that will automatically open up a move down to about 6,650 and then eventually down to about 6,300-6,400.However, 6,300-6,400 is extremely important because it was almost a five year breakout that happened in 2014. One must not forget that late 2013, early 2015 you had the Nifty rallying about 80 percent, 5,000 to about 9,000. So, that was a pretty serious move and till the Nifty is actually safe above 6,300-6,400 we will have to believe that the India story is intact and we will have to believe in our long-term targets and I would still stick my neck out and say that between 6,500 and 7,000 looks like a great buying opportunity for long-term investors having a three–five year view.Q: What about the Bank Nifty, that has been the bigger dog and probably the biggest reason why the market is so weak. Any signs of a bottom there or is it going to cause more pain?Suri: That also has had its share. Yes, it could slip a little more but what I really think is that you will see the short covering bounce which you do see from time to time but you are not going to see a total massacre that is happening out there. In fact what I really feel is that you may get a chance to retest, that is how bases are made, the previous bases are re-tested and you sort of made double bottom or higher bottoms or what have you and then you start sort of pulling up.So, as I said the pain is there, the pressure is there, there is a big sort of shadow that is looming ahead. But I don't think all is lost and it is not time to go in and put the money because finding bottoms are very expensive. Your rather wait for the market to bottom out to make some higher tops or something to get in. You may miss the early part but you are much better off trading the trend rather than catching the bottom.So, as I said there is not going to be massive damage, yes, but the basing is going to take time and in this phase personally as a trader I would be looking for stocks that relatively outperform because that is where I feel I would like to be. So, just to sum it up that I am not looking to see dramatic falls in the market. I feel we may get a little into the basing things good days, bad days but days of despondency and days of frustration but very often I feel that this is how bases are made. So, we will be in through a little more grind and pain.Q: How do you approach banks right now. A; do you think there is substantial price downside even from here and B; what are the chances that when this market eventually recovers and starts grinding higher that banks will be at the forefront once again because banks and pharmaceuticals were the leaders of the last big up move in the market. Will they again be at the forefront or do you think some other sectors have to lead this time around. We cannot take it for granted that these banks will again lead?Shah: Well with the way some of the PSU banks have behaved in the last six months you just cannot say that they would potentially be leaders because PSU banks have really taken the space where infra and reality took in 2008. The decline is pretty similar because at every support level it seems as if they will stop and they will go on to make a lower low. So, you don't want to be catching a falling knife in the PSU banking space and I do believe that there could be some more pain left.However then what concerns me right now is the set up of some of the private banks because private banks have relatively held out in the last 3-3.5 months and it is in the last couple of weeks that we are seeing some structures develop on the bearish side and some of the popular large cap banking stocks could potentially see a 5-10 percent drop in the next few weeks and if that were to happen the banking index can go down to a level of about 13400-13500. Now once again 13400 on the Bank Nifty is a very important support because that was the major breakout point on the weekly chart, on the monthly chart, a couple of years back. So, that is something that could play out in the next few weeks.However, apart from banks what I am really concerned about is the CNX IT index. It has been the safe haven sector for the last six months. Since this sector did not break down we said that maybe the Nifty is also going to be safe but now the CNX IT index breaking a level of 10800 is a very serious development that has transpired in the last few weeks and that calls for a 10 percent drop. So, in a scenario where banking index and the IT index are in bad shape and with the midcap index also chipping in it is very difficult to believe that Indian markets can actually stage a substantial recovery from current levels. Q: You were alluding to FII outflows and the dollar is at  68 to the rupee does it have more downside from here because that must be weighing on the minds of all these investors, they are getting hammered on stocks and they are getting no sucker from the rupee.Suri: If you look at the dollar adjusted Nifty you will really get a sense of what it means to FIIs and there is no joy. In fact the pain has been much more than what our vanilla Nifty is showing us. So, currency is definitely a  very important thing. The only good point in this whole currency move is that there hasn’t been much volatility, it seems to be on a much smoother curve. The destruction in currency is evident across emerging markets. It is not just stock indexes but if you go and look at the Brazilian currency or the Russian currency and you will see the kind of accidents they have had. So, apart from just the emerging market equity per se even the currencies are taking a knock and that is what is leading to a double whammy and the pain. As far as India goes I think that we will gradually move towards around 70. Though we have not really got into new low but those were volatile days and on a close to close basis we are at new lows viz-a-viz the dollar. So, I really feel that we are going to be moving towards 70. The only good point is that the volatility is not there but this is adjustment that is happening across the world.So, I guess we are there and that is a very big pain point. You have to go and see the dollar denominated Nifty and that will actually throw up a very different picture, in fact that is a bit of a scary picture actually.Q: You spoke about hunting for opportunities, which of the sectoral indices technically are looking the most promising at this point in time. For longer term investors who are trying to seek opportunity in this carnage?Suri: I think the consumption stocks are still holding on. I know it is a very beaten down and often talked about sector but if I look at the damage, in a falling market  you have got to really look for stocks that fall less. There has been damage in consumption stocks also but I find that relatively the consumption theme has held out well. There are some stocks again not all stocks but some stocks are holding out and that is where I think you can look for opportunities.I find that gold  is a very fascinating chart. If you look at gold it has been through a four year bear market and you have been hitting lower tops and taking out USD 1200 in the international gold is a very significant  thing. We haven’t had this for almost four years. Not only has it done it very quietly and smoothly, I think that gold is going to again come back into the centre stage. There is a lot happening globally in other asset classes. Very few people are talking about gold but it is very important for Indian investors. I think that currency adjusted if you look at the gold charts, if you look at global gold charts I find that gold is going to be talked about a lot more.I think there is a opportunity there and it is now actually showing a total inverse correlation to global equities. So, gold as an asset class I feel will come back into centre stage after four years.As far as stocks go, it is going to be still for some time the consumption theme, the more defensive stocks that there are, you have had some big accidents in pharma but lot of pharma stocks or some have really held out. Even in private banks you have had some very big accidents but a few of them have held out.So,  what I am looking or how I approach markets for my trading or where I  would take bets are stocks that fall less in falling markets because very often they are the leaders of the next bull run and consumption is where I still see some silver lining.(Interview transcribed by Swapnil Deshpande and Binu Panicker)