Positive global cues may propel key indices upward

Ignoring negative factors like Moody's downgrading of sovereign rating and rising cases of Covid-19, markets logged strong gains for second consecutive week as liquidity buoyancy, renewed buying from FIIs and positive cues in global markets supported the buying activity.

Benchmark indices the NSE Nifty and the BSE Sensex ended the week nearly six per cent up at 10,142 and 34,287 respectively. Sectorally, all major indices ended in green led by financials and metal.

Investors have been betting that the country will be able to both contain the spread of the coronavirus and reopen businesses in the coming months. Many are pricing in a 'V-shaped' recovery: a sharp upturn in spending and growth that follows a short, painful collapse in economic activity.

Corollary to the recently announced stimulus package, the central government promulgated two ordinances that seek to free inter-state trade in agricultural commodities and facilitate contract farming between growers and processors.

Move of the finance ministry to keep on hold the implementation of all new schemes other than those announced in the Rs 20-trillion package to revive the economy and help vulnerable sections amid the ongoing Covid-19 pandemic was a dampener.

Reforms initiated in railways, agriculture, banking, manufacturing, labour laws, power sector, civil aviation, FDI in new sectors, PSUs, coal, mining and taxation should be taken to logical implementation say critics.

Near term direction of markets will be dictated by macro-economic data (IIP and inflation data), developments on the spread of coronavirus virus, US Fed meeting, monsoon spread, movement of currency, FII inflows and crude oil prices.

Indian markets are set to open higher at the start of coming week on the back of sharp rally in US markets. US stocks ripped higher over weekend after expectations-defying data showed the country added 2.5 million jobs in May, boosting investors' bets on a nascent, if likely uneven, economic recovery.

The faith investors have in fast-growing tech firms and historic stimulus measures by the world's central banks and governments helps explain how stocks have shaken off the worst US economic contraction and civil unrest in decades.

Many internet stocks favored by individuals are also popular for hedge funds and institutional investors seeking assets with attractive growth prospects. Spillover effect was clearly visible in Indian stock market also.

Reliance attracted nearly Rs92,000 crores of investments for its Jio Platforms. Some market professionals remain concerned that globally certain tech stocks are overvalued and their shares will suffer if the economic fallout from the pandemic spreads in unexpected directions. Their reasoning:

The coronavirus and remote working are accelerating many trends- from cloud computing to digital payments- that they expect to persist beyond the pandemic.

The economic recovery taking place in some parts of the world is still in its early stages and hinges on governments not having to re-impose lockdowns should there be another spike in coronavirus cases. Further, the government intervention might be needed to support businesses if activity doesn't rebound by September.

F&O / sector watch

Mirroring the strong bullish undercurrent in the cash market, derivatives segment witnessed brisk trading with surge in volumes.

Nifty has witnessed massive short covering upmove to 10,150 and has managed to cross and sustain above 9,950 level, which is 50 per cent Fibonacci Retracement of the entire fall from all-time highs of 12,430 to recent swing low of 7,511.

Cues from options data indicates that the maximum Put options are placed at 9,800 and fresh Put writing was seen in 9,900 and 10,000 strikes, which are likely to act as a support zone. The Implied Volatility (IV) of Calls closed at 27.62 per cent, while that for Put options closed at 28.57 per cent.

The Nifty VIX for the week closed at 29.69 per cent and is expected to remain sideways. Significant improvement in market breadth was seen as over 75 per cent components of CNX-500 closed above 50-day EMA compared to last week's 40 per cent, indicating rejuvenation of broad-based participation signifying inherent strength that augurs well for durability of ongoing up move.

Going forward, this move can further extend up to 10,480-10,530 which is 61.8 per cent retracement of the correction of the entire fall. Bank Nifty has witnessed massive short-covering upmove from 19,700 up to 21,000 and has managed to cross and sustain above 20,200 level.

Going forward, if Bank Nifty holds 20,500, it can move up to 22,500-22,550. For the next week, Bank Nifty range could be 20,400 -21,800. Companies aligned to supply chain of autos are witnessing renewed buying interest.

Stay invested and add on declines in Bharat Forge, Motherson Sumi, Exide Inds and Amara Raja. Stocks looking good are Bharti Airtel, Canara Bank, Exide Inds, Godrej Properties, HDFC Bank, L&T Finance, NTPC, Powergrid, RIL, Tata Motors and Tata Steel.

Stock Picks

Exide Industries Ltd is the largest manufacturer of automotive and industrial lead-acid batteries in India and fourth largest in the world. It has plants in India and Sri Lanka and dealership network in 46 countries spanning across five continents.

Due to Covid 19 impact, for FY2019-20, net profit declined 2.20 per cent to Rs 825.51 crore as against Rs 844.05 crore in FY19. Sales declined 6.91 per cent to Rs 9856.66 crore in FY20 as against Rs 10,588.31 crore in FY19.

Post Unlock 1.0, sales have reportedly gone up sharply. With heightened interest in life insurance companies, rerating of Exide's life insurance business is on cards. Buy at current levels for target price of Rs 325 in medium term.

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