Sensex falls over 440 points, Nifty below 9800; 5 reasons why the market cracked

Heavy selling pressure continued on the D-Street, with frontline indices breaching key milestones.

The Sensex cracked over 440 points intraday, while Nifty breached 9,800-mark.

Markets crashed on the back of likely fiscal stimulus, which could increase the fiscal deficit.

The BSE Midcap index was down 1.6 percent and Smallcap declined 2.3 percent.

Power stocks outperformed ahead of power reforms announcement later today. Tata Power, Power Grid and Torrent Power gained 0.7-1.8 percent.

The Supertrend indicator gave a buy signal earlier this month on 12 September. The momentum took the index to a record high of 10,178 but soon after the momentum fizzled out.

The last time Supertrend indicator gave a SELL signal was in September 2016 when the index was trading around 8800. The index fell nearly 1200 points before the signal reversed its trend and that was in December 2016.

'Most of the indicators including SuperTrend and MACD have turned (or turning) bearish, this is quite expected considering the 300 odd point fall on Nifty,” Karthik Rangappa, VP - Educational Services, Zerodha told Moneycontrol.

“Short term traders can look at this as an opportunity to close their profitable long positions and perhaps look at short opportunities at every bounce. Investors, with long-term, patient capital should look for buying opportunities and be adding more to their portfolio,” he said.

“Over the next couple of months, the government will have to choose between (1) overshooting the fiscal deficit target, and (2) reducing expenditure if tax revenues disappoint. We remain cautious on FY2018 growth prospects even with a likely “targeted” expenditure increase even as the government faces risks of revenue slippage. We expect 10-year yield to range within 6.5-6.8% for rest of FY2018 and maintain our FY2018 USD-INR average at 65.25,” Kotak Institutional Equities said in a report.

Moneycontrol lists out five factors why the market took this hit on Monday.

The run-up in the market in the past one year or so raised concerns about the one-way rally that the Street has been witnessing. This also threw light on the skyrocketing valuations against poor fundamentals, which cautious experts have been warning about.

“Trailing valuation is one of the best indicators of valuation bubble. At 26 times trailing PE, Nifty looks expensive and investing at these levels does not give adequate returns to investors to justify investments in equity assets,” Aneesh Srivastava, CIO, IDBI Federal Life Insurance had told Moneycontrol last week.

“At these valuations, expected earnings growth is priced in and if earnings growth disappoints or market faces any external shock, corrections are disproportionate and lead to large wealth destruction,” he said.

There are investors who have turned wary of the market, following the developments around economic stimulus.

D-Street is abuzz with news of a big stimulus package which could be as big as USD 7.7 billion. The extra spending was estimated to widen the fiscal deficit for the financial year ending next March to 3.7 percent of GDP from a budgeted target of 3.2 percent.

“Stimulus can potentially increase the central government’s fiscal deficit to 3.5-3.7 percent of GDP in FY18, from the budgeted 3.2 percent target (3.5 percent of GDP achieved in FY17), depending on the size of the stimulus (0.3-0.5 percent of GDP),” Deutsche Bank said in a report.

This would be a setback to the fiscal consolidation momentum that was endured through the past few years. To counter any pessimism on D-Street, the government should clarify that this is a just one-off measure to counter slowdown cause by demonetisation and GST. The extra money will be spent more on bank recapitalisations, rural jobs programme and rural housing to boost growth in Asia’s third-largest economy.

Foreign institutional investors (FIIs), for September, have been net sellers, pulling out a huge amount of cash.

Foreign investors remained in exit mode as they have pulled out nearly Rs 5,500 crore from stock markets so far this month due to geopolitical concerns and a tendency to take profit.

The net outflow by foreign portfolio investors (FPIs) follows withdrawal of Rs 12,770 crore from equities in August. Prior to that, they had pumped in over Rs 62,000 crore in the past six months.

According to the latest depository data, the FPIs withdrew a net Rs 5,492 crore (USD 855 million) during September 1-22. However, they pumped in Rs 4,430 crore in debt markets during this period.

After taking into the account the latest outflow, the total investment by the FPIs in equity markets stood at Rs 40,253 crore (about USD 6 billion) this year.

Escalating tensions between North Korea and the United States is keeping investors on their feet.

Leaders of both the nations have been in a war of words, filled with threats, which is leading to a selloff among investors across the globe. Such a move is spilling over to India as well.

North Korea’s Foreign Minister Ri Yong Ho told the United Nations on Saturday that U.S. President Donald Trump had made “our rockets’ visit to the entire U.S. mainland inevitable” by calling North Korean leader Kim Jong Un “rocket man”.

“Through such a prolonged and arduous struggle, now we are finally only a few steps away from the final gate of completion of the state nuclear force,” Ri told the annual gathering of world leaders for the United Nations General Assembly.

“It is only a forlorn hope to consider any chance that the DPRK (North Korea) would be shaken an inch or change its stance due to the harsher sanctions by the hostile forces,” he said.

North Korean Foreign Minister Ri Yong Ho's remarks to the United Nations General Assembly came hours after U.S. Air Force B-1B Lancer bombers escorted by fighters flew in international airspace over waters east of North Korea, in a show of force the Pentagon said showed the range of military options available to Trump.

After the US Federal Reserve’s officials indicated at another possible rate hike in this year, the US dollar has witnessed a strengthening of sorts, which has put pressure on the Indian currency.

Last week, the rupee fell to its six-month low mark, before recovering during the last session.

Dealers said that the early weakness was mainly due to large foreign fund outflows and a fall in the domestic equity market.

There was also increased demand for the dollar from both domestic banks and importers as the end of the month is nigh and they could not ascertain the likely extent of the fall in the rupee over the next few sessions.

The currency has now extended its decline, falling to 65 per US dollar, down about 0.32 percent.

Pramit Brahmbhatt of Veracity said, "Weak cues from equity market and concerns about growth on the domestic front will keep the rupee under pressure." He further added, "We expect the USD-INR pair to trade in a range of 64.80-65.20 for the day."