Nifty: Bull market seems to have hit a top - 30 Stades

Nifty: Bull market seems to have hit a top

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The hope rally continued on Dalal Street last week as the Nifty closed above 10,550, which had been acting as the major resistance point for bulls. Now the attention shifts to 11,000 which coincides with the 200 day moving average (DMA) for the index. 

The short-term trend in the index remained positive and the index settled with gains of 2.16 percent, its third consecutive weekly gain. The market showed some hesitation initially but the sentiment changed as the week progressed, thanks to a rally in global markets and positive news flows such as month-on-month improvement in auto sales and purchasing manager’s index (PMI) for manufacturing.

The move was aided by news that a vaccine for COVID-19 could be available months earlier than expected.

What moved the market?

Automakers gained the most last week on the hope of a faster-than-expected recovery in sales volume despite the income shock suffered by people during the lockdown. The Nifty Auto index was up 3.6 percent last week followed by non-bank lenders, which are expected to gain from demand recovery. FMCG companies also out-performed and so did mobile operators.

Also Read: 10 tips to buy stocks without taking undue risks

Among individual index stocks Hero MotoCorp topped the chart with gains of 7.8 percent followed by HDFC (up 6.6 per cent), ITC (up 6.33 per cent) and Mahindra & Mahindra (up 5.8 per cent).

Overall the market breadth was positive and 34 index stocks ended in the green while 17 Nifty stocks declined during the week.

The rally was dominated by domestic investors and foreign portfolio investors (FPIs) continuing to book profits at the higher levels.

It is clear that domestic investors expect economic activity and corporate earnings to get back to pre-COVID-19 levels in the next few months if not weeks.

The hypothesis will face a reality test in the June 2020 quarter earnings season, which starts on July 9 when IT companies announce their quarterly results.

Rally diffusion suggests a top

The rally has now diffused to weak and lower tiers of the stock universe favoured by domestic retail investors. There has been a sharp rise in trading activity in penny stocks with negative equity values. For example stocks like GTL Infrastructure, Jaiprakash Associates, Unitech, Reliance Power, Jain Irrigation and Sintex Industries are up 300 to 500 percent from March lows for no apparent reasons. These companies continue to struggle financially as they have been doing for the better part of the last decade.

Also Read: Use Covid-19 crisis to buy assets which will generate cash flows year after year

Rise in penny and low-quality stocks is a classic characteristic of a bull market, which has hit the top and could see a trend reversal.

A similar movement was last seen in the second half of 2007 ahead of the global financial crisis in 2008.

Gold continued its bull-run and made a fresh lifetime high of around $ 1780 per ounce. Historically, gold underperforms when equity prices rise but in the last three months both assets have seen a simultaneous rally.

Also Read: Hold on to that gold

The global macros favour a further upside in gold and cautious investors are advised to raise allocation to the yellow metal in their portfolio at the cost of equity.

Nifty trajectory

The near-term trend in the market is positive and favours day traders but as the index gets close to the 11,000 level the momentum could lose some steam. The continued under performance of the banking stocks remains a major concern and the rally cannot be sustained without a breakout in the banking index.

Nifty is currently hovering around 10,600 and if the market remains at this level for a few days, it might turn into a crucial resistance. As the rally progresses, it is getting narrower in the price range as the rebound from March lows has been in the form of a rising wedge pattern. It is a bearish indicator and signals a trend reversal.

A lot of optimism is priced into the market right now and most index stocks are overbought, limiting the upside in the near-term.

This suggests that Nifty may remain sideways and range-bound, unless jolted by some big triggers either up or down.

An escalation on Indo-China border is a potential spoiler for bulls. The market may also correct if FPIs increase their selling intensity.

This calls for a cautious approach from investors and they should focus on individual stocks and conserve cash to take advantage of the next definite move that will come later this month.

(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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