India’s stock markets surprised everyone by heading upwards after mid-June, even flirting with its all-time high. Investors and observers wonder if this is the start of a new bull rally. Dinesh Nagpal, who uses Ichimoku indicators and harmonic patterns to trade stocks, tells Moneycontrol in an interview why he believes this is a bear-market rally and the best way to trade at this stage. Edited excerpts:
Is this a new bull rally or a bear-market rally?
A bear market rally. The Nifty can rally up to 18,400 if the 17,100 (support level) is protected. I expect the midcaps and small caps to outperform the large caps from here on. If 17,100 is broken, then the Nifty has completed a lower high at 17,950 and downward moves will get sharper. Then, go aggressively short and the strategy should change to sell on rise.
Also read: Rally will end at 18,125: Elliot Wave analyst Rohit Srivastava
Why do you see a rally in mid- and small caps?
Most of the small and midcaps have given fresh breakouts. If you compare the rally from June till now, they were in consolidation and did not outperform the market like large caps. Now the large caps are looking a bit tired or seem to be consolidating, when the small and mid are ready to take off.
But when the Nifty nears 18,400, I would become extremely cautious. While the index will not make new highs, there will be stocks that definitely do.
Could you name some stocks?
So ICICI Bank has been a marvellous outperformer, but this time the outperformance could be led by HDFC Bank and Axis Bank. The baton is changing hands now.
The Bank Nifty might do a small pullback next week towards 38,000 and will resume its rally. But I am not bullish on the index. I am bullish on these individual stocks.
I expect Axis Bank to trend towards the 800 level and HDFC Bank to touch a new high of 1,700. HDFC Bank is going to be one of the strongest players in the segment. After 1,640-1,650 levels, acceleration (of its stock price) will take over because it has the highest weightage in the Bank Nifty and hasn’t performed like ICICI Bank, Kotak Mahindra Bank or IndusInd Bank. While ICICI Bank could continue to deliver outperformance, the other two stocks look tired now. In ICICI Bank, I still see another 10 percent upside at least.
What do you follow to gauge the Nifty’s trend?
Ten stocks – IT (four stocks), banks (five) and Reliance – control 70-75 percent of the index. When these are giving a signal on one side, there is no point trying to be aggressively bearish.
Reliance has been in a huge triangle sideways for months now, ranging between 2,500 and 2,600 on the downside and 2,700 on the top. It isn’t giving any major breakdowns or breakouts. So the entire show is being managed by Bank Nifty and IT.
Bank Nifty, though there may be two to three days of correction, isn’t showing any signs of giving up. IT will resume its rally now. Even if the Bank Nifty goes sideways, IT will do the job. That’s why my entire emphasis is on small and midcap stocks. The mid and small will do a magnum outperformance from here on. It is typical in our market that when the market is topping out, it is the mid and small caps that lead the surge while the large settles.
And the market could top out at 18,400?
I don’t see a new high coming. Our markets are strong but the global picture is gloomy. We will continue to outperform the global markets but we can’t stay unaffected week to week when large global markets start correcting. The Dow and S&P are still struggling around June levels, while we have moved up to April level, so we are outperforming them. If Dow and S&P turn from here, then our rally will end or we might join them on the way down.
Two additional factors will hamper the up-move. One is the dollar getting stronger again. Even if the Reserve Bank of India tries its best to contain the rate hikes, when the dollar gets stronger, the central bank will have no other option but to raise interest rates.
Second factor is crude going above $100. It could go to $115 at least, and $115 is a modest estimate and a rise for which the central bank and OMCs have already hedged. But if it goes above that, it will go out of control. If it goes above $100, we should get very, very selective with the stocks.
Markets are being led by global cues more than domestic cues right now.
Also read: Is the bear rally finally over?
How are you factoring in the recession and inflation worries?
The only domestic concern we will have to deal with will be inflation.
What about the effect of recession in the developed markets on IT stocks?
I don’t expect the IT index to go beyond 32,000. It will pause there and then do a major reversal (downwards). That is because Nasdaq, IT and crypto have behaved like triplets. They move in the same direction, outperforming and underperforming absolutely together. So it is worrisome that the FAANG (Facebook, Amazon, Apple, Netflix and Google now Alphabet) stocks are in an extremely precarious position. They are at the tip of a reversal towards the downside. It is extremely scary for IT stocks.
IT was a major outperformer in 2020-2022. It is going to do a similar pullback from there (around 32,000). I would expect IT to break the June lows at around 27,000. I would say that best to go light in IT near 32,000 and definitely not to go aggressively long at that level.
Are there any other sectors where you see outperformance?
FMCG is another sector where I wouldn’t want to go bearish at all. If I can’t buy it, I would ignore it. But, I won’t short it. This is because inflation is so high that you don’t want to mess with this sector.
So can it be a defensive play?
Absolutely. In fact, I would hedge my portfolio with FMCG, instead of going full cash. I would pick good FMCG stocks such as ITC and HUL (Hindustan Unilever), instead. They are all high dividend-yielding stocks and they all have a great growth story ahead of them.
ITC is recovering from a six-year slump. Once a stock has recovered from such a slump, it doesn’t give up so easily. The rally has just emerged in 2022. HUL and Colgate also are emerging from a one-year slump. They will also see a major turnaround.
Is there a huge upside in ITC despite its recent rally?
The price of paper has gone out of control. Chinese paper mills, which are among the largest in the world, have reduced their output. Till they go back to 100 percent capacity, it isn’t going to be feasible to import paper to India. That’s a big bonus for ITC.
Plus the hotel industry has seen a major turnaround since Covid-19.
Therefore, despite the huge move up from Rs 150 (in 2020) to Rs 300-odd now, I still see this as the beginning of a huge rally. With stocks like ITC or HUL, instead of waiting for a level, I would prefer to do something like a scattered monthly SIP in them, instead of jumping in and buying all at one go.
What would you read from FIIs turning net buyers again?
If you see the FII derivatives data from June, when the market had still not bottomed out, there were 500,000-plus contracts in stock futures. There has been some liquidation after and today they are down to 4,20,000 contracts. But, the bulk of the contracts they’re buying is in stocks where FIIs have limits in cash. So, they take the derivative route. In fact, when they were selling in cash, they were buying in derivatives. If you see the rallies in Bajaj Finserv, Bajaj Finance or Kotak Bank, they were massively FII-driven through the derivative route. Therefore, quality stocks will continue to rally.
In May and early June, when the markets were tanking, they had 350,000 futures long. By the first week of June, there were 500,000-plus futures.
That is, in a declining market, which lost 500-700 points, FIIs were adding 150,000 stock futures. To figure out the stocks they added, it would be a guessing game because they don’t have to declare that. But it was easy to understand which stocks, because you just have to look at the stocks that were giving massive outperformance at that time such as metals and IT stocks, and ITC. In ITC, it was clearly an FII-driven rally.
The FIIs lure you (domestic retail investors) with a bearish view but they will continue to build in the stock futures. Now when Nifty moved from 17,000 to 17,900, they quietly reduced their positions in futures by 50,000 contracts to 400,000 contracts. They are selling on the rise.
How do you know that these stock movements are FII-flow led?
We can never say for certain which stock they are going long in or short in. But we can see FIIs net positions at the end of every day and correlate it to stocks that are higher fresh longs and higher fresh shorts, and then check the volume index. If it is a retail participant, then the volumes (that are driving a move) won’t be high because they just can’t take that kind of volume. If that is happening consistently, then you know it is FII smart money that is coming in.
How do you see the rate hikes playing out?
If the rupee stays below 80, then I don’t see rate hikes happening. Till that level and till crude at $115, the RBI can manage because they have the reserves to support the rupee and we are buying Russian oil. But if the dollar goes up and crude crosses $115, then that will begin to hurt and then the RBI won’t have a choice but to hike rates again, and steeply.
What level do you see the rupee at?
If it crosses 80, it will easily go up to 82.
If there are aggressive rate hikes, which sectors would be most affected?
NBFCs mainly. They have been pushing out money excessively and rate hikes would increase the chances of default.
(Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.)
(Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.)
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
