Bulls & Bears set to lock horns this week

Bulls seem to be once again smiling on Dalal Street after heartburn and disappointment from the Rs 20 lakh crore stimulus package announced by Prime Minister Narendra Modi and presented by finance minister Nirmala Sitharaman over five epic press briefings in May.

The package failed to live-up to the hype and the benchmark Nifty 50 declined by a little over 10 percent in 12 trading sessions post the package announcement, breaking through the 9000-mark for the third time in the last three months. This raised the spectre of a prolonged bear rally on Dalal Street.

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But they have many allies who would not let the market fall so easily from the current level. Their biggest ally is S&P500 Index, which continues to show remarkable resilience notwithstanding the terrible economic news flowing from United States, whose economy and the corporate sector the index represents at least theoretically.

S&P500 resilient

S&P500 crossed the 3000-level last week and continued its steep V-shape recovery from its March 2020 lows. The US benchmark has now recouped 71 per cent of the losses that it suffered in the first month of COVID-19 crisis. To put it differently, the index is now just 10 percent away from its life-time high of 3339 points.

A follow through rally in US indices this week will allow bulls to take Nifty towards the 9700 level. With a rollover of 75 percent in Nifty 50, the index is set to rise further as per option data. The Nifty bank witnessed a rollover of 81 percent, a sign of an upside momentum.

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However, the technical chart of Nifty 50 indicates a different perspective. A decisive breakthrough from the 9750-9800 level will require a lot of buying power and a fair amount of positive news flows at the macro and corporate levels.

This range of 9750 – 9600 is the gap down range witnessed when the index failed to cross 9,900 levels earlier. Inevitably, this selling pressure resulted in a correction towards 8,806 levels. The technical indicator Moving Average Convergence Divergence (MACD) has crossed the zero line upward, indicating positive strength intensity. All this suggests that the index will make an attempt to cross the 9700 range and one can expect a decent rally towards 10,000 levels only if it closes strongly with volumes staying at higher levels.

The weekly chart also indicates that the selling pressure may escalate above 9,580 levels. 

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Weak macros support bears

The recovery in the US equity market is supported by a monetary expansion by the Federal Reserve and record low interest rates in the US and other major markets. This is a major tailwind for global equity including India - a kind of repeat of what occurred after the 2008 global financial crisis. The bulls are, however, up against a steady inflow of extremely dismal economic and corporate news. This was in full display in India's Gross Domestic Product (GDP) estimates for the January-March 2020 quarter that the National Statistical Office (NSO) released on Friday. 

With just a week of lockdown and best efforts of NSO statisticians to juice-up growth by fiddling with last year's base, real GDP growth in March 2020 was lowest since the December 2002 quarter.  What's worse, the output in the commercial sectors of the economy - mining, manufacturing, construction, utilities and service sectors - is growing at a rate lower than the marginal cost of borrowings for businesses. This raises the likelihood of a string of business failures and corporate bankruptcies in FY21 which will be ugly for lenders that account for nearly a third of the index and led to market recovery last week.

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Meanwhile, corporate earnings have begun to contract and Nifty 50 underlying earnings per share (EPS) is already down six-per cent, pushing-up the valuation of the market. Corporate earnings are set to decline further in the current and the next few quarters that could cap the rise in the market.

Bulls are not getting support from the foreign exchange market either.

For now, we are in for an interesting week and it is best to hedge your bets. It’ll be wiser to sell on the rise and prepare your portfolio for the next decisive move in the next few weeks.

(Lead Illustration by Shefali Saxena)

(The writer, T-Rex, is not a dinosaur. He is a technical analyst from the previous century.)

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of 30 Stades.

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