Abhishek Chinchalkar, CMT and Head of Education, FYERS, favours caution and agility as markets trade at record highs. He insists this is not the time to be complacent and investors have to be stock specific as the market has already factored in lots of positives.
In an interview to Moneycontrol’s Kshitij Anand, Chinchalkar says lower interest rates, stamp duty cuts and reasonable prices are encouraging homebuyers across affordable, mid-level and luxury categories. Various incentives offered by the government is making the textile sector look good as well. Edited excerpts:
What is your view as the Nifty50 has finally scaled 16k? Will the road to 17,000 be bumpy or smooth?
After two months of consolidation between 15,450-15,950, the Nifty50 finally managed to surpass 16,000 on a closing basis on August 3. From a charting perspective, there has been a breakout of a rectangle pattern.
Rectangles are usually continuation patterns, which typically signal a continuation of the prior trend. This breakout in the Nifty has been confirmed by technical indicators on the daily time frame chart.
For instance, the MACD line has crossed above its signal line for the first time since mid-June. The RSI, which has been in a bull market zone for the past few months, has resumed its upside momentum.
Also, the Bollinger Bands, which had narrowed quite a bit over the past couple of months, have started to expand, giving early signs that volatility could be about to expand.
All these factors suggest that the index could be set for a resumption of the uptrend following two months of tight consolidation.
Speaking of the road ahead, despite the Nifty clearing the 16k barrier and despite the uptrend looking to have resumed, we would advise trading cautiously and adopting a sector-specific buy approach.
We have to keep in mind that markets have more than doubled over the past 15 months, suggesting that a lot of positives have already been discounted into the price.
Hence, any negative developments such as renewed Covid concerns, interest rate hike expectations, concerns over earnings, etc could lead to bouts of profit-booking at higher levels and thereby trigger volatility.
Sectorally, one needs to keep a close watch on financials, particularly banking stocks. Despite the higher move in the Nifty, the Bank Nifty remains stuck in a range and has been struggling for upside traction ever since the HDFC results came out. For markets to maintain the bullish rhetoric, participation from banking stocks will be important.
Also read: Nifty's journey to 17,000 could be bumpy, but bull run could lift it to 18,000 by December: Experts
The Nifty hit 15,000 for the first time on February 5 and since then it has been moving steadily. After hitting 16,000 after five months, do you think we have hit a top?
After consolidating in a very tight range over the past couple of months, the Nifty has now broken out of this range. This suggests that the index is now well-positioned to resume its uptrend in the coming days.
On a medium-term basis, we can see the Nifty attempting a rally towards 16,500-16,700. Having said that, one must not get too complacent at these levels and must adopt a sector-specific stance.
Given the momentous rally we have seen since the bottom last year, position sizing and risk management will be crucial going forward. On the lower side, 15,770 is now the immediate support to watch out for followed by 15,700.
What is your call on small and midcaps, which also hit fresh highs on August 3, and have outperformed the benchmark indices on a YTD basis? Time to be selective?
Since the market bottomed out in March 2020, midcaps and smallcaps have been in a very powerful bull market and have steadily outperformed the Nifty. Currently, there are no signs suggesting that this outperformance could be in trouble.
That said, looking at the ratio charts, relative to the Nifty, the CNX midcap 100 ratio has retraced exactly 61.8 percent of the decline from January 2018 to March 2020, whereas, the CNX smallcap 100 ratio has retraced over 50 percent of the same period decline.
Given that the ratio charts are at key technical junctures and given how powerful the rally among this space has been over the past few months, one needs to be very selective with the midcap and smallcap space, too, and choose stocks based on sound fundamentals and businesses.
Which are the stocks that are looking good on a fundamental basis that investors can buy at current levels and why?
Two sectors that are seeing good tailwinds at the current point in time are realty and textiles.
Realty sector: With the demand for residential properties increasing, developers across cities are completing the stalled projects, prompting inventory reduction and better cash flows.
Lower interest rates, stamp duty cuts, and reasonable prices are encouraging prospective homebuyers in meeting their housing needs—across affordable housing, mid-level, and luxury categories.
Also, on a technical front, the Nifty Realty index had a major breakout on the monthly timeframe chart and is expected to continue its up move.
Textiles: The sector is witnessing a renewed outlook on the back of the government’s incentives and a better stance on trade with the US and across other export markets.
The recent financials of most companies in this sector are improving, with better price realisations and reducing debt. India is the second-largest manufacturer of textiles and clothing globally, accounting for 5 percent of the global trade.
The Central government extended rebate on state and central taxes and levies scheme on exports of apparels and made-ups till March 2024.
Furthermore, the National Technical Textile Mission, Amended Technology Up-gradation Fund Scheme (A-TUFS) are expected to boost investments.
Which are the mistakes to avoid as the market trades near record highs?
The biggest mistake one could commit here is to get complacent. Given how strongly markets have rallied in a little over 15 months, stock selection, position-sizing, and risk management will be very crucial going forward.
The rise in India’s VIX despite the market heading higher is a sign that volatility could pick up in the days ahead.
Hence, one needs to trade cautiously in the coming weeks. It is important to select stocks exhibiting relative strength, backed by consistent earnings growth and fundamentals.Disclaimer: The views and investment tips expressed by 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.