It is not unusual to enter the earnings season with low expectations. Such low expectations often allow room for a positive surprise. But usually, the potential for such surprise upsides is higher, if we were to enter the earning season from a low base. That, unfortunately, is not the case this time, as we have begun to greet the Quarter 3 releases with the Nifty seeing record peaks almost every other day.
Will global indices support sentiment?
The US market is also at a giddy level. SPX has come off an exceptionally strong 2019, having witnessed a +30 percent gain, while the returns since October alone exceeded 15 percent. So, the question of an impending collapse in major indices is not entirely unwarranted.
What to expect from Nifty?
Till the last two weeks, the Nifty options traders have had to make do with extremely low implied volatility (IVs). But the decline in IV has not been sudden but sustained, allowing smart options sellers to build positions early before being too late. However, this has not been the case in the past two weeks. Though there has been a sudden jump in IV for a few days, it dropped lower again; hence building shorts may have been a difficult activity lately. This also explains the flat slope of Nifty's curve.
Ahead of the January 16 weekly expiry, there has been a short build-up along both puts as well as calls, but the late recovery prompted a good deal of ITM and ATM shorts to be covered, retaining a moderately positive outlook for the near term for the Nifty. Options traders will do well to see 12,200 to 12,500 to be broken to see directional trade, and it might be too early to sell strangles or other credit spread strategies.
In the last three months, IT, consumer goods and pharma have been laggards, delivering less than 3 percent gain.
Of these, IT has begun to swing back swiftly and pharma has always been a stock-specific counter, so we look forward to consumer goods and FMCG to provide the surprise upsides. Among those that have begun to show some traction, the oil and gas sector looks good on charts.
(The author is Chief Market Strategist at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by investment 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 taking any investment decisions.