Nifty correction may hit small, midcaps further: Manghnani

The Nifty ended at 6019 yesterday with smallcaps and midcaps taking a serious beating. The CNX Midcap closed at 8,238.80 yesterday. In an interview to CNCB-TV18, Anil Manghnani, analyst, Modern Shares & Stock Brokers shares his apprehensions on the broader markets.

Also read: Multibagger idea: Tulsian picks penny stock for 25% returns

Manghnani says any kind of Nifty correction could hammer the small and mid caps more than what it saw yesterday. "The best case scenario is that the Nifty doesn't break down and may be the midcap and small caps bottom out and then we start to rally again. However, my only concern is, if the Nifty also gives up where it starts to close, below its 20 day exponential moving average, which is roughly around 6000, then what happens is with a further correction in the Nifty, these stocks will just continue to get hammered," he says.

Below is the edited transcript of Manghnani's interview to CNBC-TV18.

Q: A word on how to approach the Nifty and the broader markets as well today?
A: There is a complete disconnect. Enough people have spoken about it for the last two-three weeks and said that the Nifty is inching up higher. Yes 6100 was a level but the Nifty inching up higher with the broader market coming down, does suggest that something is wrong with the market internals. So, the capitulation in stocks the last couple of days, especially in the midcap and small cap is quite worrying because it suggests that the large caps or the Nifty is still a buy on every dip. It is hardly a percent and has fallen only about 80 points from their highs.
However, if you look at the midcap index and the small cap index, it suggests a bear market hammering in some of the stocks that we saw yesterday. I am surprised or alarmed by the way the CNX midcap index and the CNX Small cap has just broken through the 50 day average in a jiffy without any support there.
Today being a Friday, being a weekly close, the weekly 20 exponential moving average becomes very important. It is at about 8100 for the CNX Midcap and about 3594-3600 for the CNX Small cap, so it is hardly about a percent away on both cases. So, I am watching that very closely but any close below the 20 week exponential moving average becomes a problem.
The best case scenario is that the Nifty doesn’t break down and may be the midcap and small caps bottom out and then we start to rally again. That’s the best case scenario, but my only concern is, suppose in any case the Nifty also gives up where it starts to close below its 20 day exponential moving average, which is roughly around 6000, then what happens is with a further correction in the Nifty, these stocks will just continue to get hammered. We have seen that in the past that it is impossible for the midcaps and small caps to do well if the Nifty starts to correct. So, I am a little concerned out there but I am still hoping that the Nifty holds out 6000 level and doesn’t close below that. Q: Oil stocks have corrected somewhat from their recent rally. Would you use it as an opportunity to buy something like an Indian Oil Corporation (IOC)?
A: Yes. The overall under ownership will still play out. I don’t think this is the end of the rally. The way it moved post the announcement, that partial deregulation of diesel of Rs 0.50 hike every month, the volume it did last week when the news came out, is substantially more than the last four days that it has been correcting. It has been correcting on marginally lesser volumes than what you saw on the way up which is a bullish sign for me. So, Rs 302 is 0.618 retracement of the current move in IOC and also around Rs 300 is the 20 exponential moving average. I will keep Rs 300 as a stop loss but eventually this should bounce back. I am only giving a target of Rs 343, but my overall bullishness on the oil and gas sector remains. Q: As a trader, would you buy any of the defensive names today to insulate yourself? Like Sun Pharmaceutical Industries, Lupin, anything from pharmaceutical?
A: I probably would wait. I think even they are in a mini correction mode. Yes, the longer term chart wouldn’t have changed, but from the shorter term, the fact that Sun Pharma went below Rs 700, would make me wait for a deeper correction. I am sure there will be something attractive on the downside. If the Nifty were to close below 6000, then even some of the defensives would correct. So, yes they look okay, but I would wait for a bit of correction. Maybe about 5-6 percent even on pharma stocks.
The one that could be interesting is if ITC crosses Rs 300. Although I had a feeling that it was in a mini-correction, I think the Hindustan Unilever (HUL) results could have changed the situation where one is going through that phase, for example when Infosys did with Tata Consultancy Services (TCS) over the last four quarters; where every time Infosys numbers were bad people would buy TCS and sell Infosys. So, you could have that situation given what happened with HUL post the numbers where people are now lapping on to ITC. Remember when ITC’s numbers came out, the stock didn’t do anything for two days. It is only post HUL numbers that the reaction started to inch up. So, if it closes above Rs 300, it would probably give a fresh trading breakout atleast. Hence, that is one more on the defensive side that I am watching out today.