Stock-specific activity may continue

On the back of the discovery of a new strain of coronavirus in the United Kingdom, markets moved into a panic mode with investors fearing fresh round of lockdowns during the early part of the week ended. Surviving the steep fall seen on December 21 (the biggest single-day fall since May 2020), the Sensex marginally rose 12.85 points to 46,973.54, while the Nifty was down 11.30 points at 13,749.25 during the week ended. It is pertinent to observe that this pause has come after an 18 per cent rally of the previous seven consecutive weeks. Nifty Midcap and Smallcap indices rebounded from the support near the 50 days EMA, which has been held since June. Expect the broader market to continue its outperformance amid stock-specific activity.

Currently, 96 per cent components of Midcap and Smallcap indices are trading above their 200 days SMA compared to the November reading of 90, signifying an inherent strength. FIIs have continued their exuberance for Indian equities and have bought Rs 56,643 crore worth of shares in December. With Christmas and New Year holidays, many FIIs are expected to be on vacation. However, to prop up NAVs of portfolios, stock-specific moves are likely. Key macro numbers to watch this week are the budget value for November, November infra output, current account and external debt data.

The Reserve Bank of India (RBI) will also release deposit and loan growth data for the fortnight ended December 18 and the forex data for the week ended December 25 on January 1. The market will keenly observe how the distribution and logistics for the Covid vaccine happens, and its effectiveness in controlling further spread of Covid-19. No eventful data and announcements are expected next week. Investors should stay focused on quality sectors and stocks and also watch at the trend of FII inflows, which is the main factor of the recent rally. The calendar year 2020 had once again proved the old saying of the stock market 'Expect the Unexpected' and has been one of the most volatile years for stock markets. The Nifty and the Sensex have traded in the range of 6,000 points to 20,000 points respectively. It was a year which was full of surprises and would be remembered for a lot of things including the pace with which the pandemic accelerated the scale of the lockdowns, the government stimulus initiatives and the magnitude of stock market rebounds.

The major event which everyone is looking forward to in 2021 is the announcement of the general budget on February 1. However, markets may not witness a similar kind of rally in the stock market as it was in 2020, but the overall trend may continue to be bullish. Post-Pandemic future may not match investor fantasies. Market valuations suggest the world will step into a Jetsons-like future almost as soon as the vaccinations are complete. As gradually the fear of Covid is shed in 2021, a much sharper pickup in consumption and demand, especially in sectors like auto, building materials, consumption and consumer durables is likely. Optimists predict the GDP growth in real terms at 8-9-10 per cent. It means in nominal terms, the GDP growth could be around 15 per cent. All these might lead to a roller coaster ride for the markets in the first half of 2021. Considering the recent sharp rally in the equity markets, investors should adopt utmost caution while investing. They should do a thorough analysis of their investment objective, time horizon, risk appetite and then plan their investments. Winning big and cutting your losses when you're wrong are more important than being right.

Futures & options/sector watch

Ahead of the settlement week, the derivative segment witnessed a highly volatile trading activity. In the coming week, the futures & options contracts for December will get expired and positions will get rolled over to next month. After Black Monday when the Nifty slipped close to the 13,150 mark, during the later part of the week the Nifty almost made a V shape recovery to inch above the 13,700 mark. Thriving on volatility, both call writers and put writers were seen active during the week. Fresh Put writing was seen at 13,500, 13,600, and 13,700 strikes. The highest open interest is placed at 13,000 strike followed by 13,500 strike. Fresh Call addition was seen at 13,900 and 14,000 strikes. Maximum open interest is placed at 14,000 strikes of nearly 40 lakh contracts. The Implied Volatility (IV) of calls closed at 19.32 per cent while that for put options closed at 20.37. The Nifty VIX for the week closed at 20.50 per cent. PCR OI for the week closed at 1.57 indicates more puts writing than calls. The overall option data indicates a broader range of 13,500-14,000 for the coming week. Techies expect the range bound trade to continue unless the index decisively surpasses earlier record high in the coming sessions. Market players have exhibited a highly tactical shift in the form of sectoral rotation over the last few sessions. Defensives like FMCG and pharma along with the IT sector, which have relatively underperformed the broader market over the past few weeks, have been exhibiting good strength in the present rally.

Ahead of Q3 numbers, sharp buying was seen in technology counters. There is a strong tailwind for the IT sector, which has a significant change post the pandemic. Industry observers expect significant re-rating to happen in the IT services stocks and in the next two-three years, most IT services companies are likely to trade in the range of 35 to 40 PE. Use corrections to buy Infosys, TCS, HCL Tech and Wipro. Automobile sales numbers are expected to trigger heightened activity in select auto stocks. Industry sources indicate commercial vehicle (CV) sales could see further sequential improvement but may remain weak on year-on-year basis. Two-wheeler segment may see growth lower than November. Maruti Suzuki, Hero Moto Corp, Tata Motors, Escorts, Eicher Motors, TVS Motor, Bajaj Auto, M&M and Ashok Leyland will be in focus.Stock futures looking good for buying are Cholamandalam Investment, HUL, Idea, IGL, SBI Life, Siemens and Tech Mahindra, Sell on rallies: Apollo Tyres, Exide Inds, PVR, ONGC and RBL Bank.

Stock picks

Pennar Industries Limited (PIL) is one of the leading engineering companies in India, renowned for providing innovative engineering solutions. The company is engaged in the manufacture of steel products, including Cold Rolled Steel Strips (CRSS) and Cold Formed Metal Profiles. Stock price is currently at Rs19.50. In the next three to six months, it can appreciate to Rs 32. The target price for 12 to 18 months horizon is Rs 40-50.

Gulshan Polyols Limited ("GPL") is a multi-location, multi-product manufacturing company and has become a market leader in most of its products in India with global presence in 42 countries, across three continents. The company has three manufacturing segments viz mineral processing, grain processing and distillery. Its stock price is currently Rs 77. Use corrections to Rs 68-72 levels to accumulate. The target price in the 12 to 18 months is Rs 150-175.

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