Stay cautious, avoid aggressive bets
Even as number of new coronavirus cases in the country has been repeatedly hitting fresh records, investors brushed off worries about a fresh wave of Covid-19 infections and its impact on the economic recovery. The key indices ended the week with gains for the fourth successive week. Markets have been resilient in part because investors expect further support from the RBI and Union Government. For the week ended, benchmark indices the NSE Nifty and the BSE Sensex closed 1.52 percent and 1.59 percent higher at 10,768 and 36,594 respectively. Broader markets continued to outperform as Nifty Mid-cap and Small-cap indices rose 1.4 per cent and 3.5 per cent respectively.
Currently nearly 78 per cent constituents of the Nifty Mid-cap and Small-cap indices are sustaining above their 100 days SMA compared to last month's reading of about 38 per cent. The significant improvement in market breadth augurs well for durability of ongoing relative outperformance. Structurally, the current rally from March 2020 lows is highest quarterly gain since 2014 and sharpest in magnitude since the 2018 peaks. Positive thrust in market breadth and expanding volumes, gives confidence that worst is behind and Mid-cap and Small-cap segment is at the cusp of next major bull market signaling their outperformance in coming months also. Investors should pick quality stocks in the segments. For present, the market seems to be oscillating between greed and fear. The Q1 earnings season would be of key significance as it faced the maximum brunt of lockdown. Management commentary would be keenly watched out for and could keep the markets volatile in the near-term. Q1 results of many companies are expected to be exceptionally weak, but the commentary is expected to be strong enough, which would keep the prices where they are in a narrow range. Advise investors to stay cautious and avoid aggressive bets at current levels. Book profits at regular intervals. Expect volatility to remain high and look out for sharp stock-specific moves. Both FIIs and DIIs were net sellers during last week raising concerns over the ongoing rally in the equity market, which has been rising for four consecutive weeks. It is pertinent to observe that the benchmark indices gained eight percent during four weeks, to hit a four-month high.
Key macroeconomic data to be released in coming week are: CPI and WPI inflation for June will be released on July 13 and July 14 respectively, while Balance of trade for June will be announced on July 15. Deposit and bank loan growth for fortnight ended July 3, and foreign exchange reserves for week ended July 10 will be released on July 17.
Heard on the Street: Liquidity is riding over all other concerns at the moment. As long as the support of global markets and the liquidity is there, the markets prepare for a recovery in the second half. The market is poised for a strong recovery in the second half of FY21 given the kind of strong outlook on the rural economy, favourable start to the monsoon, lower food prices and inflation and soft interest rates. The rally is based on the expectation that we will soon have a vaccine or a Covid cure. There are grounds for optimism, but also signs of irrational exuberance.
F&O / SECTOR WATCH
Expectations over Q1 results triggered brisk trading in derivatives space. From index derivatives, it can be observed that the maximum Open Interest on the Put side has shifted to 10,000 strike. Also, fresh Put writing was seen at 10,700 strike, which holds the second-highest OI. Aggressive Call writing was seen in 10,800 and 10900 Calls, which point towards limited upside in prices. However, on downside 10,700 &10,600 levels should act as strong support levels from technical front. Expect markets to remain in consolidation zone in coming week with some stock-specific action say punters. The overall options data also indicated that the Nifty could be in a range of 10,500-11,000 in the coming week.
Ahead of RIL's 43rd AGM in the coming week on July 15, stock price notched new highs. To recap, from its last AGM in August 2019, the stock rallied 63 percent and hit a record high with a market cap close to Rs 12 lakh crore. With the company successfully achieving its debt reduction plan well before its deadline of March 31, 2021, commentary in AGM will be important for further gains from hereon. Q1 results of TCS showcased the company's ability to navigate through the Covid-19 challenges. The key highlight in Q1 was a strong 21 percent YoY growth in the new deals. It has cut FY21-23 EPS estimates by 2-4 percent. Over the medium term, analysts expect TCS to be a key beneficiary of the Covid-19-driven increase in technology intensity across different verticals. From the commentary of TCS management, it can be expected that margins in the sector will be on stress despite rupee depreciation against the dollar, variable pay cuts, lower travel expense and overheads. Concerns to demand and with respect to H1-B visa seems to have faded. Look out for results of Infosys, Wipro and HCL Tech in the coming week. Stay invested for surprising gains in IOC, BPCL and HPCL.
Stock futures looking good are Biocon, Canara Bank, HUL, L&T Finance, RIL, SBI, Sun Pharma, Tata Consumer and TCS.
(The author is a stock market expert. He is former vice chairman of AP Planning Board)