Consolidation may continue this week

Weighed by unsupportive global cues, concerns over progress of monsoon, and worries over the third coronavirus wave; the stock markets ended marginally lower during the week. The BSE Sensex was down 0.19 percent, while the Nifty fell 0.2 percent for the week closing at 52,475 points and 15,799 points respectively. However, the BSE Mid-cap index was up 1.3 percent, and the BSE Small-cap index was up 1.2 percent. It is pertinent to observe that the FIIs were net sellers of more than Rs 2,000 crore worth of shares, taking the total outflow to Rs 4,256.45 crore in the month of July so far.

However, DIIs net bought Rs 1,903.45 crore of shares in July. Smoke signals of trouble are visible from different parts of the country, in the increasing Covid-19 cases, reduced pace of vaccination and the shortfall in vaccine supplies. A break in the south-west monsoon early in June has affected Kharif sowing in many parts of the country this year, with the overall coverage falling 10 per cent until July 8 compared with the same period a year ago. Track the progress of monsoon warn market watchers.

Many investors accumulate stocks of firms emerging from bankruptcy, lured by stray cases of windfall and without understanding the inherent risk in such investments. But for every occasional IBC stock that turns a multi-bagger, there are dozens that decimate wealth through equity write-downs, delisting or trading suspensions. Recent move of stock exchanges mandating listed companies undergoing insolvency process to inform them within 30 minutes of an NCLT approving their debt resolution plan, to curb insider and speculative trading in such stocks is a welcome move. Market observers expect the consolidation in stock markets to continue in the coming week. Near term direction will be dictated by developments on the new variant of Covid-19, international crude oil prices, Q1 earnings, macroeconomic data, monsoon progress and global cues. Stock-specific action could continue as companies unveil their June quarter earnings.

Heard on the Street: Investors appear to be growing more and more optimistic about how their portfolios will perform in the years to come. Disappointment is bound to follow. Optimism is as Indian as Vada Pav and Idli Sambhar. Too much optimism, though, is about as good for you as eating a few dozen Vada Pav and Dosa. In a recent survey of individual investors, it was found many expect to earn 25 per cent this year, after inflation. That might not sound like pie in the sky because the Nifty returned 45.1 per cent last year and is up 12.2 per cent so far in 2021. Recent past returns always mould future expectations. Over the long run, however, the people in the survey anticipate earning an average of 17.5 per cent annually, after inflation, even higher than for this year. People expecting positive returns in the coming 12 months, hit its highest level since 2012. Are these long-run expectations like 17.5% realistic? The higher your expectations, the lower your odds of achieving them. It's a question of coming back to earth. What if you happened to pick a big winner? The top performers consist mainly of companies you've probably never heard of, either 10 years ago or now – Avanti Feeds, Caplin Point Labs, Vaibhav Global, Alkyl Amines and Tasty Bite. The biggest winner of all over the 10 years through the end of 2020 was Avanti Feeds, up 214 times.

In terms of the absolute gain in the market capitalisation (mcap), Reliance Industries, TCS, HDFC Bank, HUL and Kotak Mahindra Bank were among the top five in that order. Avanti Feeds is a manufacturer of prawn and fish feeds, and shrimp processor and exporter. A decade ago, the company had a microscopic market value of about Rs200 crore and wasn't even paying a dividend so it could conserve capital. If you'd somehow heard of Avanti Feeds in 2011 and had the bravery to buy it, would you have had the guts to keep it? Today, even after its epic gains over the past decade, Avanti Feeds still has a total market value of only Rs8737 crores and makes up less than 0.15 per cent of assets at leading small-stock index funds. To earn the gigantic returns such stocks can provide, you need enormous skill, phenomenal luck and the nerves and reserves to withstand bloodcurdling losses. In other words, you have to take enormous risks. Yet 77 per cent of the Indian investors in the survey say that if they were forced to choose, they would rather keep their money safe than earn a high return. That implies their expectation of getting 17.5 per cent out of their stock portfolios is more a wish or a dream than a rational forecast. When fantasies collide with the real world, dreamers get their hearts broken. As the great analyst Benjamin Graham wrote long ago, "operations for profit should be based not on optimism but on arithmetic."

Quote of the week: "We don't prognosticate macroeconomic factors, we're looking at our companies from a bottom-up perspective on their long-run prospects of returning;

-Mellody Hobson

It's very difficult to predict when the next recession or stock market crash will come, so many of the best investors don't even try. Instead, look for good companies with the strength to make it through the occasional challenging economic environment.

F&O / SECTOR WATCH

Stock-specific action marked the trading pattern in the derivatives segment. On option front, maximum Put Open Interest was seen at 15,000 followed by 15,700 and 15,600 strikes, while maximum Call Open Interest was seen at 15,800 strike followed by 15,700 and 16,000 strikes. Call writing was seen at 15,700 strike then 15,800 and 16,200 strikes, while minor Put writing was seen at 15,700 strike then 15,000 and 15,600 strikes. Techies expect the ongoing result season to provide some trigger for the Nifty to move out of the prevailing range of 15,600-15,900 levels. The Implied Volatility (IV) of Calls closed at 12.56 per cent, while that for Put options closed at 14.07 per cent. The Nifty VIX for the week closed at 13.56 per cent. PCR of OI for the week closed at 1.32. Technical indicators suggest that volatility is likely to continue in the markets in near term. Nifty likely to face strong hurdle at 15,850 levels, while 36,000 level for Bank Nifty would continue to remain crucial. Sectorally, IT, pharma and PSU stocks outperformed, while financials continued to be laggards. After mild disappointment from TCS, markets are keen on results of Infosys and Wipro. Use corrections to log into IT counters. Amidst two-way movements in several sectors, resilient performance was seen from Cement stocks. Industry is expected to post 45 per cent year-on-year growth in volumes with almost stable EBITDA. Given the better-than-expected prices sustaining to date in seasonally weak monsoon necessitated by cost escalations. West and South regions are likely to lead volume growth on year-on-year basis on a low base. Industry watchers indicate good times for the sector led by higher infrastructure demand. Buy on declines Ambuja Cements, Ultratech and Ramco. Fuel demand had reportedly recovered to near-normal levels in March before the onset of the second wave of Covid-19 infections led to the re-imposition of lockdowns in different states, stalling mobility and muting economic activity. Expect heightened action in oil marketing companies. Zee5 has reportedly received good response for its OTT launch in North America. Surprise rally in Zee is not ruled out say company watchers.

Stock futures looking good are Alkem Labs, Biocon, InduSind Bank, Tata Steel, Torrent Power, Shriram Transport and Zee Entertainment. Stock futures looking weak are Aarti Inds, McDowell, Tata Motors, TVS Motors and Wipro.