Nifty: Bulls have to work doubly hard to regain momentum

Declining revenues, tumbling profit numbers and rising COVID-19 cases de-energised the bulls this week. Big market movers such as Reliance Industries, State Bank of India, Bharti Airtel and HDFC reported their numbers. The results were a mixed bag and it reflected on Dalal Street.

In the first two weeks since June quarter earnings began to be declared, results had exceeded market expectations with mostly double digit rise in earnings despite the lockdown during April and May. This lifted the spirits on the street and fuelled the rally.

But last week, while RIL revenues were lower than street consensus estimates. Profits, however, were ahead of expectation, thanks to a one time gain from stake sale in its fuel marketing business. This soured the mood on the street and RIL ended in the red on a weekly basis after four consecutive weeks of gains. Bharti Airtel reported progress on revenue front but reported a big loss due to AGR (adjusted gross revenue) dues. In the FMCG space ITC, Nestle and Asian Paints reported decline in volumes in contrast to a stellar show by Britannia and Hindustan Unilever in the previous week.

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What else pulled the market down

The end result has been a steady decline in Nifty 50 companies’ combined earnings leading to a mismatch between stock prices and underlying fundamentals. The index underlying earnings per share (EPS) declined 5 per cent during the week, putting pressure on bulls. In contrast, index EPS had moved-up in the first two weeks, thanks to better than expected results by early birds.

The sentiment also took some beating from RBI financial stability report which sees nearly 50 percent rise in bank non-performing assets due COVID-19 in a base case scenario and up to 75 percent if the post-pandemic recovery doesn’t play out as expected. This put banking and financials’ stocks under pressure that account for nearly a third of the index.

The week saw selling in banking and oil & gas stocks that together account for nearly half of the market in terms of index weightage. This was offset by healthy buying in IT, pharma and cement stocks but it’s doubtful if these sectors can push the index higher without support from index heavy weights in other sectors.

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Pharma shot through the roof

Last week, US President Donald Trump signed four executive orders restricting the pricing power of prescription drug makers including generic exporters from India. If implemented it could potentially hit the margins of Indian pharma companies' lucrative exports business to the USA. In the domestic market, the government has hinted at restricting imports of bulk drugs and APIs that would raise input costs for the sector.  

The news didn’t go down well with investors and pharma stocks saw some correction. But very soon, the entire pharma space bounced back and the sector now seems to be ready for a big move upwards after nearly three months of consolidation.

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Index hit a ceiling

Bears will look for an opening now that Nifty 50 has posted a red weekly candle after six weeks of greens.

This was in full display in the sudden strong move in pharma stocks.

Surge in pharma allowed bulls to hold on to the 11,000 levels that gives them an edge in the short term. Bulls will now try to take the index to 11,500 and muster automobile stocks like Maruti Suzuki, M&M and Tata Motors for the purpose.

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However, a failure to hold on to this crucial support would trigger a correction given that the index looks overbought on most technical parameters and optimism among investors now borders on exuberance. 

The market correction this week was accompanied with a surge in volumes which suggests profit booking at the higher level.

There is a strong possibility of a minor sell-off in the short-term led by some big index heavy weights. The Bank Nifty continued to show weakness and it could drag down Nifty 50 to lower levels and a retest of 10,600 level is a possibility in the next two-three weeks.

(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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