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Nifty: Climb to get tougher for bulls

T-Rex

11 Jul 2020

New Update

Nifty: Climb to get tougher for bulls, nifty this week, RIL, non-bank stocks, nifty range bound

The bull party continued on Dalal Street last week notwithstanding the storm raging outside. Whenever bulls feel that the pace is slowing down and participants begin to exit, a new group of party goers hits the dance floor.

This week, banks, non-bank finance companies and Reliance Industries (RIL) hit the dance floor just when bulls were feeling out of breath.

The Bank Nifty was up 2.5 percent during the week and closed above 22,000 which coincided with 100-day moving average level. The NBFC index also outperformed NIFTY and was up 2 percent last week. Reliance Industries (RIL) - its single largest constituent - made a new high and came to the aid of the bulls on Friday when it seemed that Nifty 50 will close below the 10,700 level for the week. The stock was up 5 percent and accounted for a little over half of the index gains last week.

Earlier in the week, the index was aided by technology heavyweights Infosys and Tata Consultancy Services (TCS). National Stock Exchange IT index closed the week with gains of 1.83 percent. Together, these four out-performers have 60 percent weightage in the index.

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The rally is, however, not broad based and most of the gains in the Nifty were accounted for by four index heavy weights – RIL, HDFC Bank, Bajaj Finance and Infosys.

The benchmark Nifty 50 index was in the green for the fourth consecutive week and closed Friday with gains of 1.5 percent.

Economic storm makes landfall

The short-term trend in the index remains bullish but investors and traders should note that the economic storm brewed by the Coronavirus (COVID-19) formally made landfall on Thursday when TCS became the first company to report results for the April-June 2020 period. Its net profit was down 13 percent year-on-year in the quarter, much worse than expected, while revenues slipped 6.9 percent.

Investors however bid-up the share price on Friday, thanks to a bullish commentary by the management about the forthcoming quarters. The stock was up nearly a percent that day. Now it could be a matter of debate whether a stock valuation should be driven by its published financials or management commentary especially when it’s trading at record high valuation ratios.

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The real shocker however came from Avenue Supermarts, which operates the D-Mart chain of supermarkets and grocery stores -- also one of India’s most expensive stocks.

The retailer’s profit before tax was down nearly 90 percent year-on-year in the June 20 quarter while revenues were down 34 percent Y-o-Y.

Overall, the Nifty 50 underlying earnings per share (EPS) is now down 15 percent from its pre-COVID-19 level while the index is up 42 percent from March 23 lows. The link between corporate earnings and stock prices have weakened in the era of record pump priming by central banks, but it helps to keep in mind that poor fundamentals heighten the downside risks in the event of a trend reversal.

Liquidity flows tightening

As July progresses, liquidity conditions in the market continue to tighten. Net inflows in equity mutual fund schemes were down 95 percent in June 2020 over the previous month. Brokerages expect a further decline in liquidity in the secondary market as top banks including HDFC Bank, ICICI Bank, Axis Bank and SBI together plan to raise about 80,000 crore from the market in the next few weeks. Globally, Federal Reserve shrunk its balance sheet for the fourth consecutive week and this could explain the continued sell-off by foreign institutional investors (FIIs) in India.

nifty this week climb to get tougher for bulls, 30 stades

What do charts say?

Majority of index stocks are now trading close to 200-day moving average levels and so is the index. At this level even a slightest push of liquidity would take the index to higher levels. However, this seems unlikely given the decline in money flows last week.

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The index has been trading in a range since early June when bears unsuccessfully tried to pull the market to 9500 levels. The trading range last week was one of the narrowest since March lows and Nifty is now trading around the resistance of the rising wedge and approaching the crest of the wedge.

This is one of the first signs of a trend reversal though the signal is a little weak right now. Most other technical indicators hint at a market that is overbought and little stretched in the short term with limited upside.

A decisive move will come only if the index manages to break out of the current trading range. A break-out from 10,850 will take it to 11,500 while a break below 10600 will take it to 10,300.

Investors are advised to wait for the break-out and take bets on individual stocks in the meantime.

(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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