On Dalal Street, the week gone by was one we would like to forget quickly. There were all the ingredients for the market to stage a strong pullback, but those got completely overpowered by macro-economic realities; both global and domestic.
The benchmark Nifty50 saw one of the worst weekly performances ever, as it ended with a loss of 614 points, or 5.62 per cent.
As we approach a new week, there is a rosy and not-so-rosy picture on the charts. The daily charts are deeply oversold, while the weekly charts still show room for some more downside.
At this juncture, it would be an unintelligent approach to just keep analysing the support and resistance levels for the market. It is about time we examined the factors that are delaying the recovery of an oversold market and causing it unnatural damage.
For the major part of the week, adverse global macro-economic factors caused weakness in the market. US bond yields spiked to their multi-year high levels, US Dollar Index strengthened and Brent Crude prices moved past $86 a barrel mark. All these spooked the domestic market and the Indian currency along with its Asian peers.
On Friday, in a surprise status quo, the Reserve Bank of India kept the repo rate unchanged, when the market had priced in a 25bps rate hike.
After initial confused behaviour, the market gave a total thumbs-down to the RBI move. The market disliked the change of RBIs stance from “neutral” to “calibrated tightening” of monetary policy. This virtually nullified any immediate chances of a rate cut in this cycle and made uncertain as to when the next rate hike would come, as the Governor indicated that the Central Bank was not obligated to raise rate at every meeting.
RBI neither made its intensions clear as to if and how it plans to stem the unabated depreciation in the domestic currency; nor did it make any policy statement regarding the systemic instability caused by the liquidity crisis in the NBFCs.
Yet, there are many factors that are stacked in favour of an imminent and long overdue pullback in the market. We have an extremely oversold market, which has completely disregarded something as important as 200-DMA, as if it never existed on the short-term charts. There are massive short positions in the derivative segment, and the rise in Indian bond yields has stalled. On Friday, US markets
recovered and reduced their losses while Brent crude also came off its high. What we have against us are the US Bond Yields, which are not coming off much and this would have an effect on the global and domestic markets.
Also, one more thing that can cause a delay to an imminent pullback is incomplete reaction, if any, to RBIs money policy decision.
We are not doing the usual sectoral review on Relative Rotation Graphs this week due to these extraordinary circumstances. We recommend investors to completely stay away from creating shorts and attempt bargain purchases in sectors like IT, pharma, infrastructure and select metals, as these are either the defensive ones or are showing resilience against the general weakness in the market.
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