The stock market crossed a new milestone this week as if taking a cue from the rising number of Coronavirus (COVID-19) cases. Adjusted for decline in corporate earnings in the last four months, Nifty 50 crossed 13,000 last week and hit a fresh life-time high. At the close of trade on Friday, Nifty was trading at trailing price-to-earnings multiple of 29.5x, higher than its valuation when it hit the life-time high in January this year. In the same period, Nifty underlying earnings per share is down 15 percent and the index is now just 10 percent away from January highs.
The euphoria can be attributed to a clutch of better-than-expected corporate earnings this week from top companies in IT, FMCG and private sector banks. Investors are also betting on Reliance Industries to deliver rapid earnings growth in two years from now, in complete contrast to its earnings trajectory in the last ten years.
These companies exceeded expectations largely due to a sharp cut in discretionary expenses rather than higher sales. IT companies gained from a decline in travel expenses while FMCG companies saved on advertising & brand promotion. Banks posted higher earnings as RBI has delayed NPA recognition while financial companies gained from a surge in internet-based stock trading and investing, thanks to the lockdown. These exceptional gains boosting earnings now will vanish in the next few quarters.
But investors are advised to keep an eye on the long-term earnings trajectory and discount the street’s bullish sentiment on richly-valued stocks in IT, FMCG and financial services space.
What moved the market?
As in the previous week, bulls managed to keep bears at, bay thanks to a timely rally in index heavy weights.
The advance-to-decline ratio reached its highest level in nearly 15 months but the euphoria was missing from the majority of the sector indices. Nifty ended the week with gains of 2.7 percent – sixth consecutive weekly gain but 16 out of 20 sector indices underperformed the benchmark last week.
The rally was driven by fresh inflows from foreign portfolio investors (FPIs) which turned net buyers after being net sellers in the first two weeks of July.
Events during the week
The new flow at the macro level was dominated by European summit on the stimulus package and continued flaring-up of Sino-American trade war.
Analysts expect the move to further accentuate the rally in gold, silver and other metals.
Also Read: Why you should invest in silver
What do charts say?
Nifty continues to trade above the key support level of the 200-day moving average and 20-day moving average, which is a bullish indicator for the near-term movement in the index. The index has, however, reached closer to the major resistance at around 11,350 and most of the technical indicators hint at an overbought market.
The BankNifty, which accounts for nearly a third of the market, has seen a fall in momentum. The banking index has formed a bearish pattern but managed to close on a mildly positive note.
The result season will hit the peak next week with a long list of heavy weights like Kotak Bank, Tech Mahindra, Bharti Airtel, Ultratech Cement, Maruti, HDFC, Reliance, Indian Oil and State Bank of India slated to declare their numbers for Q1FY21. This is likely to keep the markets volatile.
The short-term trend in the market is positive and the index will try to break through 11,350 and ultimately 11,800.
Investors are advised to continue with a defensive portfolio and keep booking profit at regular intervals.
(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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