It’s quite rare in market history when both fundamental and technical indicators scream a sell. Such a juncture was reached towards the end of 2017, making it evident that the period of extremely low volatility and steady increases in stock prices was about to end. While the Sensex and the Nifty surged higher in January, the buoyancy could not last and correction set in, in February.
Now that the downtrend has begun, is this the beginning of a long-term correction or is this a short-term dip? It is too early to answer that conclusively. As explained in our yearly outlook for 2018, we had reached a point where a long-term correction of the up-move that began from 2009 low had become due. Indices have begun declining from the right juncture. But the decline needs to extend and breach certain levels to signal that this downtrend will morph in to a serious long-term decline.
There are various fundamental factors that dragged global markets lower in February —spike in bond yields due to the tax cut announced in the US, the short trades on CBOE VIX backfiring, profit-booking due to steep valuation in US stocks and fear of aggressive rate hikes by the Fed’s new Chair in 2018.
Indian equities had their own set of problems with earnings quite tepid due to the GST roll-out, lack of demand hurting manufacturing and capex and the unending troubles with the banking sector. While corporate earnings for the quarter ending December 2017 have shown improvement, current market valuations have already factored in this recovery. If the positives and negatives at this point are weighed, the scales are still tilted towards negatives. Over the next couple of months, the market will try to form a medium-term base and prices could try to move higher from there. But it would be best to temper your return expectations for the year and stay clear of risky mid and small cap stocks.
Nifty (10,458.35)
The Nifty has been declining since the top of 11,171 recorded on January 29.
Short-term trend: The Nifty has been currently in a sideways move between 10,300 and 10,600 since early February. Here are some guideposts to help you navigate the next few weeks.
a) It is possible that the current sideways move extends for two to three more weeks. Stay watchful near the upper and lower end of the trading band at 10,300 and 10,600.
b) If the index breaks above 10,600, it can move higher to 10,728 or 10,824. Short-term trend will reverse higher only if the index closes above 10,824.
c) Fresh long positions are advised only on a close above 10,824. Next target is 11,171.
d) Break below 10,300 will mean that the index is heading towards 10,077; 9,736 and 9,182.
We think that there is a strong likelihood of a break below 10,300. But a halt is likely in the band between 9,700 and 10,000. This level can form a base from where a bounce-back can begin.
Medium-term trend: The medium-term trend in the index appears to have reversed lower. But we need further confirmation before that is determined. Key support level that needs to be watched now is at 9,950. A reversal from the zone around 10,000 can result in a range-bound move between 10,000 and 11,200 for a few more months before the next move unfolds. Medium-term targets on a breach of 10,000 are 9,560 and 9,170. Long-term investors need to start worrying only if the index dips below 9,170.
Sensex (34,046.94)
Sensex formed a peak at 36,443 in late January and has declined sharply since then.
Short-term trend: For the coming week, the Sensex can move lower towards the base of its current sideways move at 33,500. Fresh shorts can be initiated on a breach of this level. Next targets are 32,565 and 32,415. Resistances for the week are at 34,610; 35,000 and 35,374. Short-term traders can sell on rallies as long as the index trades below 35,374.
Medium-term trend: One leg of the downward move from 36,443 has been completed and the index is currently in the second leg. The movement of the index over the last one month suggests lack of strength and a likelihood of a move lower. The current range for the index is between 33,500 and 34,700. This range could hold the index for some more time. But break of the 33,500 level will mean that the index is moving towards 32,420; 31,650 and 29,900.
Medium-term view will turn negative on a close below 31,000. Sensex needs to close above 36,443 to signal a reversal in the medium-term trend.
Global cues
Most of the developed markets appear to have launched a medium-term correction. Few emerging markets such as Brazil and Russia with commodity-centric economies have, however, managed to put up a more resilient show.
The Dow Jones Industrial Average rebounded smartly, retracing more than 60 per cent of its decline in February. But this up-move halted abruptly last week as Trump began making protectionist noises. Immediate support is at 23,500. But if this level is breached, a fall to 22,200 or 21,000 becomes possible.
The CBOE VIX, that started the sell-off in February by spiking to 50, has since then cooled down to 15 levels. This index has once more spiked to 25 last week, implying that traders continue to remain edgy.