Deteriorating market breadth is a cause of concern

Ahead of a potential shift in US Federal Reserve policy at Jackson Hole Economic Symposium over the weekend, Indian market scaled new all-time highs during the week ended August 27. Benchmark indices, the BSE Sensex and the NSE Nifty touched their fresh record high levels of 56,198.13 (on August 25) and 16,722.05 (on August 27), respectively. For the week, the BSE Sensex added 795.4 points (1.43 percent) to close at 56,124.72 points and the NSE Nifty rose 254.7 points (1.54 percent) to end at 16,705.2 levels. After several weeks of underperformance, renewed buying was also seen in the mid-cap and small-cap stocks. The BSE Midcap index was up 2.54 percent and Smallcap index gained 2.04 percent during the week.

FIIs sold equities worth Rs6,833.33 crore during the week with net sales of Rs7,652.49 crore in August. However, DIIs with purchases of Rs 8,078.24 crore lent support to market. Observers do not expect major purchases from FIIs for next few months considering the expected Fed tapering by end of 2021. It is pertinent to observe that while the Nifty closed at an all-time weekly high, visible sign of deterioration in the market breadth is a concern. Out of 162 F&O Stocks, 78 ended in the positive with the average gain of seven per cent, while 84 stocks ended the August series in the red with the average loss of eight per cent.

Market players advice buying in large-caps and other heavyweights as any correction in markets may again derail the recovery in mid-cap and small-cap space. Analysts are expecting GDP growth rate numbers for June quarter to be close to 20 per cent. But any deviation from expectation can get a reaction from markets. Investors were monitoring US Fed Chief Powell's speech for clues about when the Fed might start to scale back its easy-money policies. The central bank has been conducting $120 billion in monthly asset purchases to juice the economic recovery, while holding its benchmark short-term interest rate near zero. Such policies have helped propel stocks to all-time highs. Powell's measured remarks signalled that Fed wouldn't rush to begin tapering, prompting the market's positive reaction after the meeting. Near term direction of the market will be dictated by macroeconomic data, international crude oil prices, FII flows and global cues. After the tepid listings in August, two IPOs- specialty chemical company Ami Organics, and diagnostic chain operator Vijaya Diagnostic Centre are scheduled to open next week.

Heard on the Street: Discussion on the start of tapering by the US Fed is again making markets nervous about a repeat of the 2013 'taper tantrum'. Analysts, however, say that both the US and Indian economies are on much stronger footing than it was in 2013, which should allow the reflation trade to return as the market digests the clarity on this taper in the coming weeks. The biggest difference is that key economic parameters viz. unemployment, US GDP growth, and inflation were below the long-run targets in 2013, while these are better than long-term targets now in 2021.

Hence, the fear of a notable economic slowdown due to gradual tapering should be a much lesser fear than in the 2013 episode. Indian economy is on far stronger footing now to prevent a repeat of the 2013 mishap. A massive rise in India's forex reserves (19.4 months of coverage of current

account deficit now versus 3.3 months in 2013), a much-less alarming CPI inflation rate (5.6% now versus 9.4% in 2013), a more robust GDP growth outlook (5.5% in FY13 versus 9.0%/7.0% in FY22/23), and possibly a more vigilant RBI currency policy are some noteworthy differences. Given the much stronger US as well as Indian economic position now versus 2013, many believe that the current growth scare may only be a temporary roadblock and the reflation trade may be back as the market digests clarity from the Fed in the coming weeks. This reflation trade may risk India giving up some of its huge outperformance to EMs. Expect growth sectors like financials and commodities to again start doing well amid clarity from the Fed and Indian growth picks up in the upcoming festive season.

Quote of the week: The four most dangerous words in investing are, it's different this time

— Sir John Templeton

Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a specific stock is its performance over five years.

F&O / SECTOR WATCH

On the back of the benchmark indices scaling new highs, settlement week witnessed robust trading activity in the derivative segment. Rollovers in the Nifty futures were at 84 per cent (last month 82%), well above 3-month average of 81 per cent. Also in value terms it was higher at 21721 Cr. versus 15027 Cr. (Nifty closed August series with gains 5%). Market wide rollovers stood at 93 per cent (last month 91%) and in value terms it was at Rs16,7435 cr, which is higher than last month Rs16,6199 cr. Option data indicates that the Nifty could see a broader trading range of 16,250 to 17,250 levels, while the immediate trading range for the index could be 16,500 to 17,000 levels. On weekly basis, maximum Put open interest was seen at 16,600 followed by 16,500 &16,700 strikes, while maximum Call Open Interest was seen at 17,000 followed by 16,700 & 16,800 strikes. The Implied Volatility (IV) of Calls closed at 10.76 per cent, while that for Put options closed at 11.45 per cent. The Nifty VIX for the week closed at 13.54 per cent and is expected to remain volatile.

PCR of OI for the week closed at 1.41. Bank Nifty is facing strong resistance in the zone of 36,000-36,300 levels above which expect Bank Nifty to join the rally and move towards 37,000 levels. Mid-cap stock futures witnessed renewed upside momentum along with IT and FMCG counters. Sectors that could outperform in the new series are financials, FMCG, oil &gas and IT. Auto stocks are expected to be in focus in the middle of the coming week as companies will start releasing August sales data from Wednesday. Monthly sales are expected to continue their recovery in August 2021 and Maruti Suzuki, Tata Motors, Bajaj Auto, Eicher Motors, TVS Motor Company, Mahindra &Mahindra, Ashok Leyland and Escorts will be in focus. Industry watchers are optimistic about the tractor segment's growth due to good monsoon and improving economic activities and also say recovery in commercial vehicle sales to improve substantially.

Strong supportive buying seen in the IT sector with focus on large-cap stocks like HCL Tech, Infosys, TCS and TechMahindra. Among the financials, Bajaj Twins were in limelight. Punters predict Bajaj Finserv and Bajaj Finance to scale Rs20,000 and Rs10,000 levels respectively in next few months. Ten additional securities were added to the Futures and Options segment -Dixon Technologies, Can Fin Homes, Hindustan Aeronautics (HAL), Indian Energy Exchange (IEX), Indiamart Intermesh, Ipca Laboratories, Multi Commodity Exchange of India, Oracle Financial Services Software, Polycab India and Syngene International. Stock futures looking good are Adani Ports, Axis Bank, L&T, Navin Fluorine, Trent and SBI Life. Stock futures looking weak are PVR and UPL.