It’s ideal to stick to large-cap stocks

Valuations are likely to become attractive after the fall continues for some more time, but not immediately

Volatile Trading

• March 14-20 period ahead would remain volatile, choppy
• Current sharp weakness may remain for some time
• The intensity may ease as positions get reduced
• Impact would be more on SME stocks as they face lower circuits

The domestic markets were very choppy in the four-day trading during March 7-13 period. Markets gained on two of the four sessions and lost on two. What one witnessed on Monday and Wednesday in the markets was a meltdown in the mid-cap and small-cap space. The situation in the SME segment was even worse and the number of stocks, which were locked at lower circuits just keeps increasing. BSE Sensex lost 1,389.47 points or 1.87 per cent to close at 72,761.80 points, while Nifty lost 499.50 points or 2.22 per cent to close at 21,997.50 points.

Dow Jones gained on three of the five trading sessions and lost on two. Dow gained 447.20 points or 0.48 per cent to close at 38,769.66 points.

The markets are worried on what Sebi Chief would do to tighten measures on the markets, which have seen unbridled speculation in the mid-cap and small-cap segment. The SME segment has been performing on a different level all together and it is here that there is maximum concern. Issue price would open on listing day at a premium ranging from 75-125 per cent and in a space of 7-10 trading sessions would again double. The feeling one got was that investing in SME was like investing in a gold mine and all one had to do was take gold nuggets home every day. Things are not so easy and when markets turn they spare no one. This is why over the last couple of months, I have been cautioning people to buy only large-cap stocks and stay away from mid-cap and small-cap stocks.

On Wednesday, one saw the parent of ITC, BAT sell 3.5 per cent stake in the company. This deal happened around Rs400-401. This, however, led to the stock price of ITC moving-up sharply to touch a high of Rs439 against the previous day’s close of Rs404.25. The share closed at Rs421, up Rs16.75 or a little over four per cent. This rise in ITC helped the benchmark indices register some positive sentiment on a day when almost everything else took a beating.

The primary markets seem to be at the receiving end and were under pressure. The listing of RK Swamy who had issued shares at Rs288 was at Rs252, a discount of Rs36 or 12.5 per cent. After a volatile day where the high and low was Rs284.50 and Rs248, the share closed debut day at Rs263.25, a loss of Rs24.75 or 8.59 per cent. On Wednesday, the share lost further to close at Rs232.35, a total loss of Rs55.65 or 19.32 per cent.

The other listing on Tuesday was from Bharat Invit, which had issued units at Rs100. The unit debuted at Rs101.10 and closed on debut day at Rs103.05, a gain of Rs3.05 or 3.05 per cent. This instrument has some unique features as all the underlying assets are of ‘HAM’ projects where there is no risk of toll collections. Second the income and expense of the trust is linked to a floating rate of interest which makes the yield insulated from rate fluctuations. The Invit closed on Wednesday at Rs103.31.

The issue from JG Chemicals Ltd listed on Wednesday and had a tepid listing. The debut price was Rs211, for the company which had issued shares at Rs221. The loss was Rs10 or 4.52 per cent. The share closed day one with further losses at Rs184.80, a loss of Rs36.20 or 16.38 per cent.

The March 14-20 period ahead would remain volatile and choppy. The current sharp weakness would be expected to remain for some time, even though the intensity may reduce after the next couple of days as positions get reduced. The impact would be more on the SME stocks as they face lower circuits and selling the shares becomes a concern. The strategy would remain simple where one has to avoid any investments in small-cap and mid-cap stocks and the SME segment for the time being. Valuations are likely to become attractive after the fall continues for some more time, but not immediately.

Supports exist at around 21,825level on Nifty, which is quite close. This would be a short-term bounce and may not hold if approached again after an initial bounce. The next level would then be around 21,250 levels. Expect markets to look for the second level sooner than later after taking a breather. The entire focus would be on buying only large-cap stocks as there is comfort in this segment. Trade cautiously.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)