Nifty is now below the 15,900 mark. The Nifty Bank has slipped below the 34,000 mark. What is the way forward for the markets now?
It’s kind of a bloodbath now. What is happening to people, who study charts and try to pick and choose where the bottoms of the market are, this market has slowly slipped into oversold territory and not just in the indices today because the RSI indicators are falling below 30, which hasn’t happened since 2020, but in several individual stocks as well.
I am coining this as a bear market. What happens in the bear market is that you get oversold and then the markets continue to fall further, even into the oversold zone, the complete opposite of what we get used to in a bull market, where prices continue to rise even when they are overbought. Today, we are seeing the complete opposite of that and that is why we have not gotten ahead of this market in terms of trying to bottom out. That’s the first thing we had to do.
Second, we can come up with some target levels and a poll of support. We will try to look at what the conditions are for a possible rebound in the market, but we are not very capable of seeing rebounds beyond the one or two days that we see in the middle when one is slightly oversold. That’s what’s happening.
In terms of resistance, we are looking at around 16,600 as our best case if there is any rebound in the market. On the downside, we are looking at the 15,400-14,800 range. We have some projections around 15,450 and we’ll be looking at if that holds fast in terms of the level and what the structure is there and then we’ll see if there should be more downside.
We try to follow the downward trend of the indices and see how it continues to show new patterns and levels. On Bank Nifty today, it broke the three-day low for the first time because while Nifty has been falling for the past few days, Bank Nifty has not joined. By doing that, it now points towards 32,000 and then below that. , down to around 30,500 as a major support level.
What is the sense you get in terms of the mid-cap side of the market? Do you think this type of flow will tend to continue and that small or mid-cap companies will underperform? PMS was never that big, but now it’s pretty big. Do you have a substantial part in some of these mid- to small-cap names?
The main indication is getting there and so if one just looks at the pattern in January, the Nifty did not make a new all-time high, but the small-cap index did have a divergence within the market. Over the last six months, we have seen a number of these divergences where certain sector indices hit new 52-week highs, which are not confirmed by Nifty. So when something like that happens over a six-month time horizon, we take that as a sign of a spread in the market or a divergence.
Various parts of the economy are not really working together and that is where the market is signaling a potential top. Now that it has happened, what we are seeing upside down is that the small cap index has already passed the March 22nd low that we had actually reached in assessing the Russian attacks. That is an indication that it will also happen to Nifty and Bank Nifty and that is what we are trying to look for.
So in a sense, the weakness in the small and mid caps would continue, they are giving a major indication that this drop is going to be bigger than it already is.
So what would you essentially do? Would you stick with some of the FMCG and TI names because they have traditionally proven defensive or would you just wait and see?
If you were in a bigger uptrend, that would be fine. But if you are in a potential bear market, then probably the strategy would be to look for certain stocks or sectors that are doing well. In this type of market, the stocks or sectors that can resist can be very limited and identifying them may not be easy. The only place that can be considered defensive is probably the pharmaceutical industry because medicine is something you wouldn’t think of in a demand crisis.
But what happens is that when markets go down like this, all sectors are affected. We have seen even pharmaceutical and health care stocks fall in the last week or two, so there is very little room to hide. At this stage, the only place is cash. So one can hide in cash and wait for the markets to bottom, I don’t think there’s really a place where you can find solace right now.
What is your opinion on the metal space? Metal prices have plunged globally and now metal stocks are bearing the brunt as well. How do they look on the charts?
There are stocks that are oversold for days and then drop a lot more and that is happening with stocks like Hindalco and Nalco where they have RSI below 20 and they keep falling 4-5% every day. So this is a complete trend reversal that we had before, which I coined as the reflation trade from 2020. We had a weak dollar and rising commodity prices. Now that trend has apparently changed.
For a long time, metal prices have held up against the dollar, in fact, for much of 2021 and that ended in April. In April we saw the new high in the Nifty Metal Index and also in the US, the Dow Jones Industrials and Metals Index made a new high and both reversed from there. What’s happening is that the commodity sector is giving in to the idea that we have a rising dollar, that it’s not just a rebound against the trend, which is what I was also thinking until last month, but which is actually breaking an uptrend. That could last a bit longer and is going to do the opposite, pushing commodity prices into lower territory.
That’s why we’re seeing all this unraveling in the metal sector. So I don’t think the metal sell-off is over. Of course we’ll look for a place where they can bottom maybe near March or maybe a little bit lower than the March 2022 lows and we may get something like a pullback rally but when we get that too I’m not sure that we do it. quickly return to new highs.
There may be a bounce at some point, not right away; wait a week or two, but once we get to that low point, the metals could show a countertrend, a strong rebound. But again it is a contrary trend that will happen. In general, we want to stay away from metals for three to six months before returning to it from a longer-term perspective.
Do you think that if some of the quality names that people have in their portfolios have been corrected, one can buy them now?
That’s a good option, but I wouldn’t say right away. I’m saying we’re in free fall and when you’re in free fall, you want things to stabilize a little bit more than they have now.
As I said, the RSI for the index is dipping below 30, we’re not sure… it could go to 20, it could go to 15 if this becomes a selloff. At that point, if you’re looking at defensives from a three to six month perspective, and we’re saying okay, we’re in a bear market and you still need to invest and be in a place that falls less than the rest of the market, then probably FMCG and pharma work.
Many of the MNC FMCG stocks have historically shown signs of holding up better during bear markets. In fact, pharmaceutical stocks sometimes even bottom before the market itself and that is why pharmaceuticals are also a good defense. I would probably look at the pharmaceutical industry first more than anything if I had to do that.