Range-bound trading likley amid ongoing polls

Spooked by the rise of US inflation to 40-year high triggering expectations for faster US Fed tightening in 2022, increasing oil prices amid geo-political tensions between Ukraine and Russia and continued FII selling, the domestic stock markets closed on a bearish note during the week ended February 11, 2022. The BSE Sensex fell 492 points to 58,153 and the NSE Nifty declined 142 points to 17,375 points.

The broader markets also witnessed selling pressure and the Nifty Midcap declined 2.3 percent and Smallcap plummeted 4.5 percent. FIIs net sold more than Rs 5,600 crore during the week, taking monthly outflow to over Rs9,700 crore in February. Their total selling was more than Rs1.52 lakh crore since October 2021. One takeaway from the past week in markets is that 2022 is starting to look like what many predicted heading into the year.

In recent weeks, several factors have helped stocks, according to investors and analysts. One has been a solid round of Q3 corporate earnings. With an unexpectedly Dovish stance, the RBI once again avoided joining other Central Banks.

RBI appears to be of the opinion that inflation is transient, as seen by its lower-than-expected inflation forecasts for FY23. This runs counter to the global trend and raises few concerns, given the backdrop of soaring crude oil and commodity prices. RBI's lack of direction on this front leaves Indian market exposed to the Fed's manoeuvre in March. Expected sharp increase in petrol and diesel after the conclusion of State Assembly Elections may fuel inflation feel observers.

Some global analysts have noted that this rate-increase cycle could be more dangerous than some others because stocks have entered at elevated valuations in many markets across the globe. Optimists say that markets don't like uncertainty, but think this cycle will play out like the others where the economy and corporate profits are strong enough and that markets will be higher at the end of the year than we are now.

Another key event to watch out for would be the developments related to five States elections including Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur. Assembly polls in Uttar Pradesh have already kicked off last week, while Uttarakhand, Goa and Punjab polls will take place next week. Manipur polls will be in the last week of February. Considering the ongoing global developments like Russia-Ukraine stand-off, US Fed actions and inflationary trends; markets are likely to continue to remain volatile and range-bound in near term. Investors are advised to sit tight on their quality investments and avoid aggressive bets till a clear direction emerges.

Market Musings: Stocks have rarely been this expensive. That doesn't (necessarily) mean they're headed for a crash. Robert Shiller, a finance professor at Yale University, who won a Nobel Prize in economics in 2013, measures how expensive stocks are by taking the price of the leading index of that country like S&P 500 index of US or Nifty50 of India, dividing by the average of its past 10 years of earnings and adjusting both the price and the earnings for inflation.

The past isn't a constant; it's in constant flux. The respected investor Jeremy Grantham recently wrote that U.S. stocks and other assets are so overpriced that they constitute a superbubble, setting up the largest potential markdown of perceived wealth in US history. Trimming your stocks a bit as they rise always makes sense. But dumping all your shares because they are near record highs makes sense only in a world of perfect certainty—which exists nowhere but in fairy tales.

F&O / SECTOR WATCH

Mirroring the heightened volatility in the underlying cash market, the derivatives segment witnessed brisk volumes with large daily swings in select counters. The maximum Call Open Interest was seen at 18000 strike followed by 17600 &17500 strikes, with Call writing at 17400, 18000 & 17500 strikes, while the maximum Put Open Interest was seen at 16500 strike followed by 17000, 17400 & 17100 strikes, with Put writing at 17100 & 17000 strikes, and Put unwinding at 17600 & 17700 strikes. Implied volatility (IV) of Calls closed at 16.35 per cent, while that for Put options closed at 17.59. The Nifty VIX for the week closed at 17.71 per cent. PCR of OI for the week closed at 1.36.

The options data indicates that the Nifty could see a wider trading range of 17,000-17,800 levels in the week ahead. Bank Nifty has major supports at 38100 & 37800 levels. However, for further upside Bank Nifty needs to give move above 39200 level to regain its bullish momentum. Select pharma counters are witnessing renewed buying interest.

Stay invested in Aurobindo Pharma, Laurus Labs, Sun Pharma and Biocon. However, industry watchers caution that surprise inspections by US FDA may play spoil sport and dampen sentiment. Resilient performance was seen from PSU Banks. Use declines to buy SBI, Canara

Bank, BOB and PNB. The ongoing crisis between Russia and Ukraine is weighing on the global sentiments and international crude oil prices are at multi year highs. Keep a watch on stocks in Oil & Gas space.

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

STOCK PICKS

Wendt (India) Limited is a manufacturer of super abrasives, grinding, honing and special purpose machines and components. The super abrasive business consists of Diamond/ cubic boron nitride (CBN) grinding wheels in various bonding systems, hones, dressing rolls, segmented products and stationary dressers. The company has developed and established models/variants for the Steel Industry viz., High Precision Tungsten Carbide Ring Grinding Machine: Delta 450/350/250, PDM 400.

The company is a preferred supplier for many of the automobile, auto component, engineering, aerospace, defence, ceramics customers for their Super Abrasive Tooling solutions, Grinding & Honing Machines and Precision components. A major contribution to the company's revenues in the forthcoming years is expected to come from these industries. The company's subsidiaries include Wendt Grinding Technologies Limited and Wendt Middle East FZE. The company's manufacturing plant is located at Hosur, Tamil Nadu. Buy on declines for target price of Rs7500 in medium term.

The Sukhjit Starch & Chemicals Limited is a manufacturer of starch and its derivatives in India. The company is engaged in development, manufacturing and distribution of Maize Starch, Dextrin, Liquid Glucose, Malto-Dextrin, Dextrose Monohydrate, Dextrose Anhydrous, Sorbitol-70 per cent Solution and various by-products, such as Maize Oil, Maize Oil Cake and Corn Gluten. Excellent Q3 results and good visibility of earnings in coming quarters make the stock good buy for medium term target of Rs750.