The most common phrase in the equity market has always been, ‘its liquidity-driven rally’. And why it should not be? Eventually, the outcome based on any reasoning is the movement of liquidity in and out of markets, and one such reason which finds its place in valuation and in sentiments is political risk.
It was known to all that as the world’s largest democracy heads towards the election, this rally will halt or take a breather and such halts or pauses are seldom without correction.
However, the zillion dollar question was not if but when this rally would stop. Though in hindsight, it was always easy to spot but answer lied in the way some of the parameters are moving, viz Dollar Index (DXY), Gold, and Crude to name few.
Equity markets have shown an inverse correlation with the dollar index and the rational behind the same is extensively discussed in markets.
DXY stabilised around 92-93 and then showed up move which coincided with markets correcting globally. On the other hand, gold unlike what history says has shown a direct correlation.
Gold too formed near term top and corrected and equity markets followed. This is a statistical explanation for recent correction but will this correction continue or will it be bought into? The study of sectoral movement may help us to throw some light to find the direction for the market in the near term.
A quick glance on different index movement suggests that liquidity has been moving toward defensives, specifically in pharma and IT.
Even on the liquidity front, we are witnessing that last week FIIs sold heavily in the cash market whereas DIIs have been shying away from markets as their consistent buying is not seen in the recent past.
Even RIL which is most heavyweight stock and has done really well since April, has not managed to repeat that glorious performance, though it has still outperformed. The shift has been towards defensives. So, what next?
We all know that there is a big gap between fundamentals and price at this point in time and let’s accept the fact that difference will remain, at the most may mitigate but won’t go away.
Don’t anticipate very big correction unless aggressive shorting is visible in Nifty. So far, shorting has been in BankNifty, and as you can see it has underperformed.
Last week there was a substantial reduction in Nifty open interest but that still suggests long unwinding. It’s a sign of caution but still doesn’t conclude that big correction with set in as long as shorting is not visible.However, a period of large upside seems to be behind us till the time world is done with US elections. Technically too we have challenged levels of 11000 in Nifty.
Needless to mention that BankNifty is weak and short-term participants should focus on finding resistance and not support in this index. Strong support of 21000 has been breached by a small margin which brings down resistance to 21700-21800 levels.
As far as midcaps are concerned, there is clear double top formation in CNXMIDCAP index which suggests near-term top. The same sort of formation took place in the month of February 2020.
This doesn’t mean the same nature of correction will take place but suggests that the upward journey will wait for now.
(Siddarth Bhamre, Independent Market Strategist)
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