It is common knowledge that if bulls are strong on a particular day, the stock market ends higher. And if bears have the upper hand, the broader market drifts lower. That's why they say “don't fight the market but follow it”. In other words, just take the winning side.
But what if both the sides in the battle become indecisive? The result is a range bound market that moves in a tight channel, unable to make a breakthrough in either direction. This makes it tough for traders to make a strong buy or sell call. This is where the Indian markets have reached after a swift recovery from the March 23 lows when Nifty tanked 1,135 points to close at 7,610.
Nifty 50 ended last week with gains of 1.4 percent, which keeps the market trajectory in the green zone.
This is either because they are once again commanding rich valuations or because most of the good news has already been discounted by the market.
In the pharma sector, for example, earnings triggers like the launch of COVID-19 drugs by companies such as Glenmark and Cipla failed to push the sector higher. NSE Pharma index ended the week with gains of just 1.4 percent, underperforming the benchmark index, which is not a bullish sign for a sector that should be leading in a public health crisis.
Reliance Industries, which accounts for a third of the index rise from March lows, shows a similar trend. The stock was down 0.5 percent last week. FMCG companies and IT exporters such as Tata Consultancy Services and Infosys were top gainers. A good show by these defensive and low risk stocks, however, suggests a lack of confidence and risk aversion by equity investors.
The leading stocks indices in the United States seem to have hit a near-term high and ended the week in the red. S&P 500 was down nearly 3 percent during the week, further mudding the waters for equities.
Macro environment turns bearish
At the macro level, news flows continue to turn bearish with a risk of a fresh round of trade tension between the US and China on the one hand and the US and the European Union on the other. A fresh round of tit for tat tariff between the world’s top three trading blocs would be disastrous for the global economy.
Internationally, there is a growing discomfort about rising asset prices without a commensurate growth in GDP or corporate earnings. The International Monetary Fund (IMF) has said that financial markets are out of line with economic realities and expects up to 10 percent correction in asset prices.
In the meantime, gold made a fresh high this week and seems poised to go higher, boosted by record monetary expansion by the US Federal Reserve.
Diesel shock for the commercial sector
Petrol and diesel prices continued to rise for the third consecutive week in contrast to global crude oil prices that remained benign. In a big surprise, diesel is now more expensive than petrol in many parts of the country. This is a big negative for the transport, manufacturing and the farm sectors given that it’s a basic input. There is now fear of a cascading effect on the entire economy in the form of higher logistics costs that would push inflation further up, forcing RBI to raise interest rates.
Higher prices of diesel would also raise the cost of farming and manufacturing, feeding into the inflation spiral. This, in turn, would impact consumption, hit returns on savings and reduce the purchasing power, adversely affecting the demand revival in the economy. This could prove costly for corporate earnings and equity markets.
What to watch out for
After this week's gains, Nifty 50 is up 37 percent from its 52-week low on March 23.
This level of 10,500 coincides with a 61.8 percent Fibonacci retracement of the fall from top to the recent bottom.
The short-term trend is up as the index continues to trade above its 20-day moving average line. The upside is however limited as traders start booking profits whenever the index hits the upper band of the range.
There is a risk of a negative surprise in July if FPIs start selling and markets can really fall from the cliff. The index has already bounced back 37 percent from the lows, which is a good level for markets to drift lower.
For now, bulls seem to be tired and the bears could have the upper hand at the first wisp of any bad news.
(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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