Multiple signs telling us D-Street’s catch-up rally is coming to an end

The week after the festival season saw a huge gap-up start on the back of positive global clues. But the optimism faded soon after and fears of a resurgence in coronavirus cases, power tussle in the US and high stocks valuations eroded much of the value and Nifty could end only with a mild gain.

Massive FPI buying led to the biggest gap up rally in the past two weeks, which wasn’t visible during the entire lockdown period rally since April. This shows that optimism has reached its peak, at least from an intermediate point of view. Further, more than 10 stocks are getting included in the F&O ban list on a daily basis, and this suggests the market is hovering around its overbought levels. There is too much optimism and it is time for a healthy correction to cool down the charging bulls.

It would also be worth noting that even good news has not been able to lift stock prices of late. For instance, Hero MotoCorp saw the best Diwali sales in a decade and ended with all-time post-festive low inventory of less than four weeks at dealership levels. Yet, the stock could not sustain at higher levels. When positive news cannot take stock prices higher, it is an indication that the markets are in the overbought territory.

As soon as FPIs slow down their buying intensity before Christmas, the market may witness a healthy correction.

Equity funds, a major constituent of DIIs, witnessed an outflow for the fourth consecutive month in October, with investors moving out some Rs 2,725 crore compared with an outflow of Rs 734 crore in September. This seems to signal that equity fund managers continue to book profit at higher levels even as investors raise liquidity by selling mutual fund units.

It is quite astonishing that DIIs, a major market participant, have managed to sell equities worth net Rs 30,000 crore in the market so far this month. This shows that DIIs are already anticipating a correction and are one step ahead of the move.

Event of the Week

The US Treasury Secretary recently announced that key pandemic lending programmes would cease on December 31, 2020, and that decision has sent shivers down the spine across the world. The surprise termination of lending programmes would manifest itself into a grim economic outlook and may have a cascading negative effect on the global economy stung by the deadly virus.

Also, it seems unlikely that this decision would go down well with the Republicans and Democrats, as they would strive to alleviate the stress caused by the pandemic. With the impact of Biden’s victory and amid the power tussle between US Treasury Secretary and the US Fed, the market is expected to remain on its toes. But one thing is certain: all this indecisiveness could cause jittery on Dalal Street.

Technical Outlook

Nifty 50 ended the week gone by with a mild gain after making an all-time high of 12,963. But now the benchmark index has formed a bullish reversal pattern, which opened with a gap near the high point of the week and then gave up all the gains. The velocity of the rally has declined along with the volume participation. In fact, Nifty has been facing resistance at the rising channel, which is visible on the weekly chart, and might continue to struggle going ahead, as it lacks participation from the top index movers such as RIL, HDFC and banking stocks, who have become a bit stretched for the short term. We advise traders to keep an eye on the benchmark and go short unless Nifty breaks the rising channel on the upside.

ET CONTRIBUTORS

Expectations for the Week

Mr Market is likely to see some buying in the lower-order stocks, implying some sort of catch-up rally there. Industry laggards are now trying to catch up with the industry leaders in terms of price action. This process may continue as Nifty has formed an intermediate top and is likely to witness a correction in the frontline stocks. Further, smallcaps and midcaps may see a catch-up bounce. However, they may eventually imitate the frontline players and see a correction. India Inc’s quarterly earnings season has largely concluded and the bourses are likely to keep an eye on global clues and/or look for any major updates related to the vaccine for future direction.

Investors may look to book profit at current higher levels and wait for a correction before starting fresh buying. In addition to this, investors can look to accumulate quality IT and pharma names at current levels.

Nifty50 closed the week 0.62% higher at 12,859.



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