Short corrective rallies more likely

The period under review June 9th-15th, saw markets taking a beating on expected lines. The period began well with gains on Thursday and was followed by a sell-off on Friday. Post US inflation numbers which came on Friday, it was a major fall across markets on Monday and could be called a maniac Monday. Tuesday, markets were down but just about.

They were however choppy and volatile and had actually at one point of time recovered all the losses and traded positive. Wednesday was a day of comparable stability with markets fairly range bound. At the end of the period, BSE Sensex lost 2,351.10 points or 4.47 per cent to close at 52,541.39 points while Nifty lost 664.10 points or 4.23 per cent to close at 15,692.15 points.

Dow Jones had a torrid week and lost on all five trading sessions. Dow was down 2,814.98 points or 8.48 per cent to close at 30,364.83 points. This is incidentally a new 52 week low for the Dow at 30,144 points. Further, Dow is now down 16.44 per cent on a year-to-date basis. On a comparative note, the BSE Sensex is down 9.81 per cent on a year-to-date basis while Nifty is down 9.58 per cent.

US Fed meets for its rate hike on Wednesday late night and the same would have been announced by the time you are reading this column. The expectation was between 40-50 basis points before inflation numbers were announced but has now gone up to be around 75 basis points. The last time such a hike was done was around 1975 when rates were raised by 75 basis points because of the oil shock.

Markets in the US would react sharply in either direction post rate hike. Assuming it is around 75 basis points or more, expect markets to fall sharply and if it's around 50 basis points, the fall could be lesser and markets would then wait for the minutes of the meeting which would indicate some insight into the next rate hike and quantum. US is facing inflation woes and at the same time the balance sheet size is being cut significantly over the next six months.

FII's or FPIs have continued to remain sellers in the cash market and also futures on a regular basis. While domestic funds have been buyers, it is not enough to keep markets in the green as the sellers are desperate to sell looking at the rising interest costs and the fact that India is one of the few markets where they are still making money.

There has been no activity in the primary markets last week and none is expected in the coming week as well. Issuers are waiting and watching the markets with no clarity as to when issues would come. The pipeline of IPO's is strong and there are close to 100 issues pending at various stages.

Markets have taken support around the current levels on multiple occasions. At levels of 52600-52,700 on BSE Sensex and between 15,650-15,700 on Nifty. This was also the level at the time of the Russia-Ukraine war that markets took support. There was a huge rally post, of roughly 16-17 per cent. This time around markets have spent the last three days at the same levels. If they were to break by any chance, there could be one sharp dip before recovery. If they hold, there could be a recovery.

Thursday is a crucial day as far as the FED hike is concerned. Rate hike happening is a certainty and it is unlikely to stop at 40 or 50 basis points. Whether it goes to 75 or even higher is the moot point. This will lead to increased volatility in the US and increase the flow or force of sales from FPI. Expect short corrective rallies in India at best in the coming period under review. One should not expect any major reversal for the time being. Post this sell-off of FPI's there could be some sanity. The trading strategy should be to sell on rallies and avoid the temptation of buying on dips. The next set of results is sometime away and hence no new news flow either is expected.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)