Understanding the Week Ahead: Taking a holistic view of the Markets as tug-of-war between oversold Markets and macro-economic factors continue

Understanding the Week Ahead: Taking a holistic view of the Markets as tug-of-war between oversold Markets and macro-economic factors continue

With the session on Friday coming to an end, the week that went by remains the one which we would like to forget sooner than ever. The Markets that had all the ingredients of a sharp pullback got completely over-powered by macro-economic events; both global and domestic. The benchmark Index NIFTY50 saw one of the worst weekly performances ever as it ended the week losing 614 points or 5.62%.

As we approach the coming week, there are there is a rosy and not-so-rosy picture on the Charts. The Daily Charts are deeply oversold while the Weekly Charts still show some room for some downside.

At this current juncture and in the present scenario, it would be an unintelligent approach to just keep analyzing the supports and resistance levels of the Markets. It is the time that we examine the factors that are delaying the recovery of such overly over-sold Markets and causing it an unnatural damage.

For the major part of the week, there were adverse global macro-economic factors that caused weakness in the Markets. They were US Bond Yields spiking to their multi-year high, US Dollar Index strengthening and the Brent Crude prices that moved past USD 86 a barrel. All these spooked Indian Markets and domestic currency along with its Asian peers. However, on the Friday, it was the surprise “Status Quo” from the Reserve Bank of India as they kept the Repo and Reverse Repo rate unchanged.

A rake hike of at least 25bps was expected by the Markets. After a initially confused behavior, the Markets gave a total thumbs down reaction to the RBI’s move. Few reasons that were completely disliked by the Markets was the change of RBI’s stance from “Neutral” to “Calibrated Tightening” of the Monetary Policy. This virtually nullified any of the immediate chances of rate cut in the present cycle and made uncertain as to when the next rate hike would come as the Governor mentioned that the Central Bank is not obligated to raise rate at every meeting.

The RBI neither made any of its intensions visible of stemming the unabated depreciation of the domestic currency; nor did it make any policy statements regarding the systemic instability caused by the liquidity crises in the NBFCs.

So, if we attempt and make sense out of all the above factors, there are many factors that are stacked in favor of an imminent and long overdue pullback. We have extremely over-sold Markets which completely disregarded something as important as 200-DMA as if it never existed on the short-term Charts, massive short positions in the derivative segment, Indian Bond Yields stalling its rise after no rate hike, the overnight US Markets which recovered and reduced their losses and the Brent Crude which has come off its highs.  What we have against us is the US Bond Yields not coming off much and the resultant effect on the global and domestic Markets. Also, one more thing that can cause delay to such an imminent pullback is the incomplete reaction, if any, to the RBI’s decision of not raising rates.

We are not performing any sector review on Relative Rotation Graphs this week given these extra-ordinary circumstances. We recommend completely staying away from creating shorts and attempt bargain purchases in sectors like IT, Pharma, Infra and select Metals only as these are either the defensive ones or they are showing resilience against the general weakness.

Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst
 (MTA, USA / CSTA, Canada / STA, UK)  | (Research Analyst, SEBI Reg. No. INH000003341)
Tel: +91-70164 32277  | www.EquityResearch.asia | milan.vaishnav@equityresearch.asia

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