Markets To Enter Volatile Zone Ahead Of Budget

Indian stock market will begin trading on Monday in its penultimate trading week before the presentation of the Union Budget on February 1. The indecisiveness displayed by the Indian benchmarks in the last two sessions of the trading week ended on Friday has already indicated that the next fortnight before the budget is going to be highly volatile.

Despite ending the Friday session with heavy losses, the Nifty and the Sensex ended the week with a gain of 2.7 per cent. However, the Midcaps continued to outperform benchmark indices with Nifty Midcap-100 gained 5.2 per cent during the week.

Till the Union Budget is presented, markets are expected to witness unusual hype and hysteria on hopes and expectations from the budget which will drive the volatility even higher.

Rusmik Oza, Executive Vice President, Head of Fundamental Research, Kotak Securities said, “The MSCI Emerging Market Index has broken the pre-Global Financial Crisis (GFC) peak of 1,345 seen in 2007. If it sustains above 1,350 for one-two more weeks, then it would confirm the break-out and go into a new zone. Any structural up move in the MSCI Emerging Markets Index could also have a positive impact on Indian markets.”

During the week gone by, the market remained buoyant on expectations of incremental fiscal stimulus of $1.9 trillion declared by President-elect Joe Biden in the US, strong 3QFY21 earnings print thus far and decreasing domestic COVID-19 cases. It is during the next week, that the world will also witness the change of guard in the US on January 20. The transition of power is expected to remain calm and peaceful.

Tata Motors was the biggest mover in Nifty-50 during the past week gaining 32 per cent. The other  two big gainers were Bharti Airtel (11.7 per cent) and ITC (8 per cent). Some of the high-profile wealth-creating and defensive stocks corrected the most this week. Asian Paints was the biggest loser in Nifty-50 having lost 9 per cent followed by Bajaj Finserve (5.9 per cent) and Shree Cement (5.6 per cent). The number of stocks going up and down in Nifty-50 was equal during the week at 25.

FII flows continue to remain robust with Rs 7,160 crore flowing in the first four days of the week. On the other hand, local mutual funds continued their selling spree with Rs 6,500 crore of selling in the first four days of the week.

However, the dollar index and crude prices rose to $90.50 and $56 per barrel, respectively, which is negative for the emerging market. The firm trend in crude oil is an indication of relaxation in the social distancing norm world over will lead to rise in oil demand. If the firm trend in prices prompts oil-producing nations to resort to a production cut, which may further take the prices northward. This may take its toll on inflation worldwide.

These factors along with the rising bond yields in the US, a reversal in the dollar index were the two main reasons for the weakness witnessed in the US markets over the weekend, as even after the incremental stimulus package of $1.9 trillion was unveiled, Dow and other indices ended in the red. The stimulus announced was perceived as lower than expected. This also impacted Asian and European markets to end lower.

 In fact, S&P 500 index, which has been dictating the trend in global equity indices, is now trading negative for the week and other emerging markets such as Taiwan (TAIEX) and South Korea (KOSPI) are also trading sideways to mild negative bias.

Technical charts too indicate weakness in the market going ahead. Every week, the market has formed a Doji formation which is an indication of indecisiveness. Currently, the chart indicates that the market has taken a breather ahead of the major event of the Union Budget.

Nirali Shah, senior research analyst, Samco Securities said, “A break below 14,430 in Nifty can trigger a profit-booking. Immediate support and resistance in the short term are now placed at 14,430 and 14,640 respectively and a break on either side will lead to a directional move in the short term”.

Although Nifty50 closed the week on a positive note after making a new lifetime high, the index witnessed a narrow trading range and formed a bearish

Shooting Star candlestick pattern on the weekly chart. The market is overstretched on the upside, so this can cause a short-term dip or weakness in the near term.

Shrikant Chouhan, Executive Vice President, Equity Technical Research, Kotak Securities said, “Selling short is advisable below the level of 14,350/48,800 of Nifty and Sensex respectively. Take a contra bet of taking long or buying positions between 14,050/13,950 (47,500/47,700) levels. Keep a final stop loss at 13,800/47,300”.

Last week belonged to IT sector companies as all the four leading IT companies –TCS, Infosys Technologies, HCL Technologies, and Wipro—posted extremely good results. Generally, the third quarter of the financial year is considered weak for the IT sector companies. However, this time, all four biggies have posted stellar performances.

Indeed, their stock prices are historically expensive, but with TCS and Infosys gaining market share and its management’s upbeat commentary of a multi-year technology upgrade cycle plan going ahead, earnings momentum may continue for a reasonable period of time. Shah advised investors “to stay invested in this sector for the long haul”.

After the big IT companies released their Q3 earnings, during the week beginning Monday, the domestic market will shift its focus on the Banking and The finance sector as major Banks and  NBFCsare to release their quarterly result.

Vinod Nair, Head of Research, Geojit Financial Services said, “The market can be volatile going forward including concerns over how the Union Budget will be? We suggest investors consider partial profit booking."

Due to rich valuations in the large-cap counters, there might not be a significant rise seen in these counters till the budget is presented. For the next two weeks period, the market may offer a lot of trading bets, as it is expected to turn highly volatile ahead of the budget. In this situation, instead of looking to invest for the long haul, market participants should look at medium-term opportunities that are still available in plenty in sectors like metals, commodities, and cyclical.

However, valuations there too are not cheap, cautioned Shah.