Rising Covid Scare Likely to Keep Markets Volatile

All the attempts made by the Indian market to come out of the nervousness are proving futile. The market confidence has taken a beating because of two main reasons; sudden spurt in Covid-19 cases in the second wave of pandemic and Foreign Portfolio Investors (FPIs) remaining net sellers in Indian equities in the current month till date. The impact of these two factors is so severe that other equally important factors like strong Q4 performance posted by the information technology (IT) companies like TCS and Infosys Technologies have become ineffective. 

As a result, during the last truncated week, after tanking on the opening day of the week on Monday (April 12), the market attempted to regain the lost ground during the remaining three sessions of the trading week. Nifty-50 ended lower by 1.48 per cent on weekly basis to close the week at 14618, the Sensex was down by the same margin 1.50 per cent to end lower by 732 points at 48,832. The broader markets underperformed the benchmark and ended with losses in the range of 2.7-2.9 per cent. 

Market movement in the new week

The week beginning Monday is expected to mirror the high volatile market movements witnessed in the previous week. This week will also have four trading sessions as it will be a holiday-shortened week. The Indian market will remain close for trading on Wednesday, April 21 on account of Ram Navami. In absence of any major event, the focus would remain on the earnings as companies like ACC, ICICI Pru, HCL Tech, and M&M Finance will announce their results during the week. 

The weak market confidence is also evident from the fact that despite the Indian Volatility Index (India VIX) coming down and settling around 20.50 per cent at the end of the week, the US 10-year Bonds yields witnessing a sizeable fall, and Indian met department forecasting consecutive third normal monsoon across India, the cautiousness that gripped the mindset of domestic investors in the wake of movement restrictions imposed akin to lock down in many states as Covid-19 related cases are unrelenting and shortage of vaccines in India posing a question mark on India’s rapid economic recovery.

India's South West Monsoon for 2021 is expected to be normal at 98 per cent of the long-period average, the India Meteorological Department said on April 16. A range of 96-104 percent of the long-period average is considered normal monsoon. This will be the first normal monsoon in three years after two above-average monsoon rainfall in the last two years, which is welcome news for an economy dented by a second 'wave' of Covid-19 cases and reduced activity due to localised curfews and lockdowns.

However, the correction if any going ahead can be construed as a healthy one ignited by fears of a second wave of Covid-19. Just when investors expected a resilient recovery in our economy, markets began to falter and showed hiccups due to vaccine issues and rising cases. However, a section of market participants is of the view that the current situation of rising cases will peak soon and the authorities will shortly tide over the problem of vaccine shortage.

Nirali Shah, Head of Research, Samco Securities said, “Nevertheless, it is expected that once the vaccination drive starts in full-swing, things should come back in control. Investors are advised to look at corrections as an opportunity to rejig their portfolio and invest in quality companies.”

Even after posting results that outperformed market expectations, leading quality IT counters that were sold into as most positives are already factored in the stock price which led to market participants turning cautious on their growth leading to pressure on the stock. 

“But from a wider perspective, there is a long runway of growth in IT companies and investors can continue to invest on every dip without any hesitation”, Shah opined. 

Another set of market participants is of the view that the market moving southward in wake of rising Covid-19 cases and its resultant lockdown-like situation is fairly low as currently, the earning season is on. The Q4 results from India Inc are expected to remain better. This will restrict the downward journey of the benchmark indices. Also, the strong global cues and the news about the Chinese economy growing by 18 per cent in the first quarter of 2021, signaled the expectation of faster recovery in the world, helping the world benchmarks hitting new highs last week. Such developments will continue to help the domestic market sentiment too. 

Rusmik Oza, Executive VP, Head-Fundamental Research, Kotak Securities said, “However, we expect a strong earnings season, going forward could restrict any major downside that could come due to rise in Covid cases. Since developed markets are showing strength and trading near new highs, it is not easy to be highly bearish on the market”. 

Technical Forecast

The Nifty is still not out of the woods as it continues to trade below the 50 DMA placed at 14,864. If it fails to break past the 15,000 mark, then the probability of downside goes up. 

Ajit Mishra, VP Research, Religare Broking, said, “On the benchmark front, Nifty has been hovering in a range of 14,200-15,000 for the last two months and needs a decisive break on either side for the next directional move else the prevailing phase of consolidation will continue”. 

Nifty has formed a hammer candlestick pattern just around channel support and at previous support. The support level of 14,250 has now become a make-or-break level for the Nifty index. Any break below the current support will trigger a bearish sentiment across the broader markets. 

Shah said, “We suggest traders maintain a cautiously bullish bias on the index and initiate long positions around the support by maintaining a strict stop loss just below the Nifty support at 14,250. Resistance on the higher side is now placed at 14,900.

The Strategy in the coming week

Till the time we achieve a peak in the second Covid-19 wave, the situation of partial lockdown may continue. There are reports that the centre may consider stricter lockdown measures once the polling process for the state assembly election comes to an end on April 29. This may further stall the recovery. As the earning season is on, market participants must not read much into India Inc.’s numbers but should concentrate more on the management commentary in order to gauge future growth prospects amidst the second wave. Further, any correction may turn out to be a blessing in disguise for the ones who felt left out in the past rally.