The sharp selloff in the boarder market seems to indicate that the mid and smallcap space may potentially be 'topping out' for the medium term, and the benchmark indices could see a 'multi-week or a multi-month consolidation', Gautam Shah of Goldilocks Premium Research said on October 7.
In a conversation with CNBC-TV18, Gautam Shah said domestic buying may cushion the market fall, but indices may not quickly head back to new highs. "Not to say we will collapse, as domestic liquidity will keep the market protected, but we may not see new highs in a hurry," Shah said. "Market internals have gone weak, and the next few weeks will be challenging."
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However, he added that this correction remains a part of the larger bull run. "This is still a larger correction in a bigger bull market. If we do nothing over next 2-3 months, and if the earnings season goes off well, then we are on our way."
Goldilocks Research believes this correction is going be 'unlike anything we may have seen in the recent past', especially after the rebound from Covid-19 lows. "This is not a 'garden variety' correction," said Gautam Shah, adding that the manner of market fall hints the recent highs could be a short term top. "Some pullback is possible, but it is also possible that markets have gone into a multi-week or a multi-month consolidation," he added.
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For Goldilocks Research, 24,800 on Nifty will be an important level to track from a near term perspective. If it breaks, investors might have to prepare for levels of 24,000, Shah said. "I would be very happy if we stay in this 24,000-26,000 band over the next 2-3 months, and oscillate between greed and fear," said Shah, adding that quality will continue to attract money even in this period.
On Nifty Bank, Shah said the index has corrected in the past few weeks and the structure looks spoilt. "It may come down to levels of 49,500, if that happens you could see another 3-5% correction here."
Indian markets have seen a sharp selloff in trade at a time when other EM peers have managed to hold up. Gautam Shah attributed this India-specific correction to factors like flows to China, unrest in Middle East, flare up in oil prices, and a rotation trade into China at the cost of Indian equity positions.
Gautam Shah adviced investors to stay with quality, and with that, metals and IT offer safety. "Prepare for slightly more difficult times and don't jump at the slightest sign of a rebound, to buy the dip," he added. The Metal Index has the potential to deliver 25% returns from current levels over next one year, he added, highlighting names like Hindalco, JSPL, SAIL, Nalco and Tata Steel will stand out. Within IT, Shah adviced to stick to the top quality names like TCS, HCLTech and TechM.
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The ongoing correction is likely to be different from recent ones as we had been seeing for the past 12-15 months. "It had come to a point when we were getting 3-5-7% short of short corrections, and markets scared but came back to support levels." This time, that trend may not play out, he added.
Gautam Shah pointed out the weak market breadth over last four weeks, and highlighted that the number of stocks hitting 52-week highs had reduced, indicating the weakness in Indian stocks. He also sees a $10-15 flare up in crude prices from present levels, and Dollar Index may test 106-107 level, will may pressure US stocks as well.
"For oil, $65 had been a base, and we can now test $90-95 per barrel," he added.
Gautam Shah sees this comeback of Chinese equities as 'durable', and the underperformance is getting corrected now. The Hang Seng index is already up 32% in last one month. underscoring the rebound.
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