Markets likely to be choppy amid swings

Buoyed by sharp gains in Reliance Inds (RIL), easing of Indo-China border tensions and indications of 'green shoots' in economy, the domestic markets rebounded during the week ended September 12, 2020. The BSE Sensex climbed 497.37 points or 1.30 percent to close at 38,854.55, while the Nifty-50 gained 130.60 points or 1.15 percent at 11,464.45.

However, the broader markets underperformed frontline indices with mid-cap and small-cap indices losing one per cent and 0.5 per cent respectively. The rroader markets are expected to relatively outperform the benchmark indices, as after past two week's correction of nearly eight per cent both Nifty mid-cap and small-cap indices found support from 50 per cent of retracement of their August rally.

After Sebi decision on allocation of funds by mutual funds (MF) to mid-cap and small-cap segments, market players expected heightened action in these segments. Reallocation of Rs 40,000 crore from large-cap to mid and small-cap stocks is expected. Out of this Rs13,000 crore will go to midcap and Rs 27,000 crore to small-cap stocks. Accumulate quality mid-cap and small-cap stocks, which offer fresh entry opportunity with favourable risk reward. WPI and CPI inflation data for August will be released on Monday. US Fed meeting in the week ahead may set tone for global markets. US Fed is largely expected to keep interest rate zero, but all eyes will be on the commentary with respect to economic recovery especially after the fall in US markets led by tech stocks and stalled much-awaited fiscal stimulus package in the Senate, and ahead of US Presidential elections in November.

Heard on the Street: Derivatives have been called weapons of mass destruction. However, in recent times the new breed of investors of Covid times armed with derivatives are raising volatility and exhibiting 'power of retail investors.'

This heavy use of derivatives may also explain some unusual market dynamics. Because shares tend to inch higher steadily, but drop more rapidly, rising markets usually occur amid falling volatility. After blistering sell-off days, the stock markets are rebounding quickly, suggesting investors are still seeing buying opportunities when markets dip. But the dramatic swings have highlighted a shift in market dynamics that may continue to foster instability. The markets are driven by a rare combination of retail investors and high-octane derivatives trading. Because of the influential role of turbocharged retail investment, prices can be expected to remain choppy.

Moreover, the global markets are entering a period where typical covid-19- related volatility may be exacerbated by the twists and turns of America's presidential election.

Quote of the week: Know what you own, and know why you own it - Peter Lynch

Do your homework before making a decision. And once you've made a decision, make sure to re-evaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future.

F&O/ SECTOR WATCH

On the back of tumultuous trading in US markets, derivatives segment witnessed brisk trading in both stock futures and indices. In the options segment, sharp punters were seen writing Puts at 11,400 and 11,300 strikes and the highest Open Interest (OI) was placed at 11,400 strike, which is likely to act as immediate support in the coming week followed by 11,300 strike.

Fresh Call writing was seen at 11,500 strike which also holds the maximum OI and is also likely to act as an immediate hurdle. The Implied Volatility (IV) of Calls closed at 18.98 per cent, while that for Put options closed at 19.43. PCR OI for the week closed at 1.48 slightly up from the previous week indicating Put writing in OTM. The India VIX, which measures the volatility, dropped by six percent to end below 21 levels. Move beyond the 25-30 range would be a cause of concern say observers. Indications are in favor of further consolidation in the Nifty. Sectorally, IT, energy outperformed while banks and metal underperformed during the week.

Reliance Industries (RIL) has been among the best performing stocks since the markets hit their low in March 2020 - rising from around Rs 875 levels then to Rs 2,315 now. The rally has been fuelled by the company's ability to attract marquee global investors - first in its telecom business vertical, Jio Platforms, and now in the retail arm. The stock looks strong from a medium-to-long term view and indicates a rally towards the Rs 3,000 mark over the next few months. The Supreme Court has adjourned a petition seeking extension of moratorium and waiver of interest on interest till September 28, 2020. Further, the court ordered that loans classified as performing as of August 2020 will remain standstill until the case is disposed. Financial stocks are expected to remain range bound till the outcome of the SC judgment. Industrial production contracted for the fifth consecutive month in July, by 10.4 per cent, slower than June's 16.5 per cent. Stock futures looking good are Adani Enterprises, BPCL, Dr Reddy's, L&T Finance, Siemens, TCS, TVS Motors and Zee Entertainment.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)