Investors need to trim portfolios

The General Budget 2020-21 disappointed the capital market and investors. The Indian stock markets witnessed one of the worst falls in the past decade.

Barring IT, the sectoral indices fell much more sharply. As the Finance Minister failed to give a booster dose or stimulus proposals to boost the demand and revive the economy, the Nifty fell sharply by 2.83 per cent on Budget day. Overall, Nifty lost 586.40 points or 4.79 per cent this week. The BSE Sensex also fell by 4.5 per cent.

The recent outperformance of Mid and Smallcaps also vanished. The Nifty Midcap and Smallcap fell by 4.6 per cent and 4.5 per cent during the week. On the sectoral front, the Nifty Metal index fell maximum by 11.3 per cent and energy index by 7.8 per cent. Another major sectoral index Nifty Bank drifted down by 1420.85 points or 4.55 per cent.

My suspicion about the rally has proved right. By breaking two prior swings and a strong base, the Nifty entered into a downtrend. It also closed below the 200 EMA beside indicating downward movement. This is the biggest weekly loss after September 2018 fall.

Interestingly, Nifty is just holding in May-June 2019 support area. Nifty added another distribution day and closing below the 200EMA is a very bad sign for the market.

Incidentally, Nifty also broke down the two upward channels and met the targets in just two days. In fact, 22 weeks rally of 1,773 points in Nifty retraced 50 per cent in just weeks.

As mentioned in earlier columns, the 11,800 major support has broken down with a huge distribution. We were discussing about the negative divergences in all the major indicators, which also proved right. Now the RSI has reached to almost oversold condition on a daily chart.

On only three occasions in the last three years the RSI reached to the below 30 level and bounced from 22 to 23 levels. Currently, it has reached to 30.13 (generally below 30 considered as oversold).

As the Bollinger Bands expanded and the Nifty moved out of the lower band, there is a possibility of a pullback. One should watch whether this pullback can sustain at least above the 12125-12160 zone.

As long as it trades below these important levels (50 and 20 DMAs), it is better to trim the portfolios for the time being. With Saturday's fall, the MACD gave a sell signal on the weekly chart. The most important aspect of this fall is that it closed below the monthly pivot, which has long-term bearish repercussions.

In this changed scenario, investors must trim their portfolio size and stay in cash as much as possible. It is the time to exit the stocks which offered double-digit returns.

The ongoing earnings season is also not giving any surprises, and Nifty PE is at a historical high. Unless companies report good earnings, we can't expect the market to perform.

Historically, whenever Nifty PE reaches to 28 and above, corrections are severe. Most of the corrections are 11 per cent to 25 per cent. However, market fell by 64 per cent in 2008.

At present, Nifty fell by 6.4 per cent from the recent lifetime high. With this correction, Nifty PE also came down to 25.75. Valuations wise below 20 to 15 PE can be considered as a decent value zone. As mentioned last week, most of the major tops also made in the Jan-March period. This time may not be different.

(The author is a financial journalist and technical analyst. He can be reached at tbchary@gmail.com)