Stretched valuation zone not good for building portfolios

Amid global volatility, the Indian stock markets ended last week on a weak note. The benchmark indices closed below the key supports. The NSE Nifty lost 287.95 points or 2.42 per cent during the last week. The BSE Sensex lost 2.8 per cent.

The broader indices Nifty Midcap-100 and Smallcap-100 lost by 1.4 per cent and 2.9 per cent respectively. Barring Energy index, which gained by 0.5 per cent, all other sectoral indices closed in the red. The PSU Bank index lost by 4.5 per cent and Nifty Auto and Metal indices lost by 4.2 per cent and 4.1 per cent respectively.

The institutional activity in October was negative as the FIIs bought Rs14,537.40 crores and the DIIs sold Rs 17,318.44 crore worth of shares. The benchmark index, the Nifty formed a bearish belt hold candle and closed below the two weeks low. It also closed below the October 15 low. Its decisively closing below the 20DMA for the last three days.

All the global markets were in a bear grip during the last week. Many of the market leaders faced a sell-off during the previous week. The S&P-500 index, which is the benchmark for all global market, developed serious negative divergences in all long time frames.

The Dow, in fact, has broken down the double top pattern. The S&P500 and Nasdaq too have double top topping formations. The Dow has tested the September lows and just took support at 200DMA. At the same time, the VIX in all markets is rising.

This indicates the volatility back to a higher degree after forming a base for the last six months. Moreover, the four big tech stocks, Amazon, Apple, Microsoft, Facebook has weakened after weak earnings reports. The only bright spot Alphabet (Google) which traded higher at the weekend. S&P500 large-cap index too has a serious negative divergence breaking the supports.

In this weak global background, the Indian market, in fact, is the outperformer as of now. After failing to close above the 12,025 resistance, it has broken the key support of October 15th low of 11,661. During the last three days, it is the market is following the global peers.

Unless the 11,995-12,025 zone of resistance is cleared with a follow-through day, the Nifty will test the September lows or 200DMA. The 20DMA is still trending down even after the Nifty is trading above it for the past 74 days. The Nifty takes support at 50DMA during the last week. The momentum has picked up to the downside.

The MACD line is below the signal line approaching the zero-line very fast. The directional movement indicator is also suggesting the increasing bearish strength in the benchmark index. The Nifty lost 3.19 per cent from October 15. In any case, it closes below the 50DMA (11548), which is just 0.76 per cent away, is a first signal to apply the sell rules of trading. A close below 11,548, the Nifty may test the 200DMA 10,703 very fast.

The next week is very critical as the US presidential election scheduled, and the world markets are waiting for an event trigger. At the same time, the second wave of Covid pandemic and the lockdown fears across the European markets are also a fear factor haunting the markets.

The Indian market may not be resilient anymore as the global risks are increasing. The market rally may not sustain unless the growth in earning picks. The stretched valuation zone is not good for building a portfolio aggressively. It is time to protect the profits and take out some of them from the table.

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