Markets could correct by 4-5% in next couple of months; avoid leverage play: Gautam Shah

People worship Lakshmi, the Hindu goddess of wealth on this day. (Image: Reuters)

Gautam ShahJM Financial

The Nifty50 hit the magical number of 10,000 in opening tick on Tuesday but from both technical as well as fundamental parameters market is looking overbought and it looks like we are the cusp of first meaningful correction in over a year.

This is a historic moment which should be celebrated in every right. Market levels are never about destinations, but it is all about the journey which has been a special one in the last one year. This journey is here to stay.

I would like to congratulate Indian investor for being an integral part and catalyst of this mega move which we have not seen in previous milestones. Having said that, one should not get carried away by believing that this is not going to be the case of happily ever after.

Probably for the first time in 2017, the market is reaching a point wherein technically and fundamentally markets are looking little overbought. There should be some caution at current levels.

Technical charts suggest that the large upcycle which started close to 8,000 on the Nifty gets completed around current levels. I think there is a wall of resistance around 10,000-10,100 mark.

It makes a lot of sense for investors or traders who are sitting on profits to book out of trading/leverage positions. I think we have not seen any meaningful correction in the past 6 months and the first meaningful correction of Nifty might well start from current levels.

While this is a short term view, but for the medium term we remain extremely positive on markets and by the end of 2017, we might scale another milestone in the form of 11,000 marks.

I think we are on the cusp of first meaningful correction of 2017 because things are very complacent right now – it looks like buying climax.

The momentum is great, India VIX is languishing, largecaps, midcap and smallcaps doing well at the same time. Category B, C, and D stocks have started doing well suddenly. So, just about everything is in place to suggest that markets could potentially be topping out.

For the short term, entering at these levels from a risk-to-reward perspective is not justified. Investors can stay put and ride the correction. For traders, who are looking to leverage should avoid because this is certainly not the right time.

I won’t be surprised if we see a 4-5 percent kind of drop in the next couple of months. Hence, somewhere around 9,400-9,500 mark, there is a value from a risk-to-reward perspective. This is one level which investors can work with for fresh entry.

Which sector to bet on:

I see value in metal and auto space which should do well irrespective of market performance in the next 3-6 months. Apart from that, we also like to add IT and pharma on which we have been negative for the last 1 year.

But, there is a complete change of scene in the last couple of weeks. I think some of these underperforming stocks in both of these sectors could see significant upside in the next couple of months.

Disclaimer: The author is CMT Associate Director, Chief Technical Analyst- JM Financial Services Ltd. The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.