It’s Time To Stick To Large-Cap Stocks

Markets gained new momentum, with key indices hitting record highs. However, the focus now shifts to the future, as investors await Q2 earnings results and navigate a shortened trading week. Sector rotation continues, and negative global cues could be the only roadblock to sustained market gains

The domestic markets during the September 19-25 period were choppy, wild and above all we had two major events which impacted the market significantly. Firstly, we had the US rate cut on Wednesday their time which saw markets react on Thursday in India and then the FTSE indices rebalancing which saw its impact on Friday. Net-net markets were given a new momentum on Friday.

Markets have a mind of their own and they behave irrationally when they are exuberant. What better example of this can there be other than what happened after the US Fed announced a rate cut of 50 basis points on Wednesday US time. What did the markets do? They rallied strongly and then closed in the negative after getting the cut of 50 basis points in the US. The next day they rallied, and Friday was yet another day. At the end of it all, the rate cut gave the ammunition to markets globally and they were on fire when they closed for the week. Markets gained on four of the five trading sessions and were flat on Tuesday.

Our markets made new highs on an intraday basis and closed at new highs as well. BSE Sensex was up 2,261.67 points or 2.68 per cent to close at 85,169.87 points, while Nifty gained 626.65 points or 2.47 per cent to close at 26,004.15 points.

The big turnaround rally witnessed on Friday was reflective of rebalancing in the weightages of FTSE all world and FTSE all cap indices that went through semi-annual rebalancing. More than a billion US Dollars have flowed in on this count on Friday itself and it reflects in the net FPI buying on Friday which was Rs14,064 crore. Domestic Institutions were sellers of Rs4,427 crore.

The interest rate cut of 50 basis points in the US saw the band being fixed at 4.75-5.0per cent. The FED has also said that there would be two more rate cuts of 25 basis points in the two meetings remaining for the current calendar year. This saw a flip-flop in the US markets on Wednesday post the rate cut being announced. Markets rallied initially and were up 381 points before profit taking saw markets lose and close in the negative, down 103 points. They rallied strongly on Thursday and gained 478 points. At the end of the week, Dow gained 669.58 points or 1.62per cent to close at 42,063.36 points.

The primary market pipeline continues to be strong and we have a surfeit of IPOs in the market place whether they be on the main board or the SME. One doesn’t talk about the SME issues simply because not much is known about them and the regulator is quite concerned about events happening there, On the main board one saw three listings on the exchange on Tuesday where two of them debuted with gains of over 32per cent while one closed in the red on day one itself. There is an underlying message here which needs to be borne in mind about grey markets premium. They have a tendency to reduce and, in many cases, disappear as the issue gets subscribed and closer to listing day. Investors must bear in mind that this alone can’t be a basis of subscription in an IPO.

Euphoria continues to drive the momentum in markets and the twin facts of Fed rate cut and FTSE rebalancing were the drivers for last week’s rally. With markets at lifetime highs on both an intraday basis and closing basis, it’s time to take stock of what the upcoming July-September results could have in store for all of us. The previous results for the April to June quarter, saw the slowest growth in the last nine quarters and were disappointing. While being optimistic is fine, one should have a pool of money available to take advantage of the situation when needed.

The September 26- Oct 1 period ahead sees September futures expire on Thursday (September 26). There is also a trading holiday on Wednesday (October 2). Hence, the period would be of a mere four sessions. The current value of Nifty at 25,925.95 points is higher by 773.05 points or 3.07per cent compared to the previous month’s close of 25,151.95 points. Sector rotation is on, no doubt. While in the previous week IT was the performer, this week they were the laggards with Banking and Auto chipping in as the start performers. FMCG giant Hindustan Lever also had a great showing.

Markets are on a trip of their own and only negative global cues can stop the current mood and uptrend. An important key would be Quarter 2 results which would start in another 15 days from now. If the poor show of results continues there would be a problem in the performance post the quarter results. The strategy would be to continue to take some money off the table and trade in large-cap stocks.

(The author is the founder of Kejriwal Research and Investment Services,

an advisory firm)