Macro data, global cues to dictate near-term mkt direction

Unnerved by the hawkish RBI policy with elevated CPI forecast and imposition of Incremental Cash Reserve Ratio (ICRR), weak Chinese data, fresh concerns on monsoon spread, less than expected IIP and PMI data and other weak global cues; the summer stock market rally has started to cool after the benchmark indices fell modestly for a third consecutive week. The Sensex lost 0.60 per cent or 398.6 points to close at 65,322.65 points, and the Nifty shed 0.45 per cent or 88.7 points to end at 19,428.30 points. However, like in the preceding fortnight the broader markets outperformed the benchmark indices. The BSE Mid-cap Index rose nearly 1 per cent and the BSE Small-cap index added 0.6 per cent. FIIs sold equities worth Rs4,702.06 crore, while the DIIs bought equities worth Rs2,224.3 crore. Rupee continued to be on weaker wicket against dollar closing for the week at 82.85. International crude oil prices have risen for seventh consecutive week, backed by supply tightening and record demand forecast. Brent crude futures are now at $86.81 a barrel. The rising oil prices are always a risk for large oil importer like India. With the end of Q1 results season, the near term direction of the market will be dictated by the macroeconomic data and global cues. In the week ahead, the market will react to IIP numbers for June with a focus on monthly CPI and WPI inflation numbers, and FOMC minutes. Inflation has been back in focus globally, with data points sending investors conflicting signals. For markets that have priced in a soft-A scenario where the US Federal Reserve curbs inflation without starting a recession, every inflation data point is critical.

September is traditionally the weakest month for U.S. stocks. This year, investors say the turning of the calendar should be especially worrying. If history is any guide, investors’ optimism will soon be put to the test. There is no clear reason for what is known as the “September effect”, but it is typically a month without the type of news that can push stocks higher, such as major corporate earnings. The basic theory is that good news almost always comes from the companies, and the bad news comes from random events. Inflated valuations alone don’t cause stocks to drop, but they can make a decline more severe. In the IPO segment, SBFC Finance and Concord Biotech will make their debut on the bourses on August 16 and August 18, respectively. Both the stocks are enjoying decent grey market premium.

Listening Post: For investors, that ‘gut feeling’ can be more powerful than they realize.

Here’s how to listen to your gut without being ruled by it. If only financial markets came with traffic signals: indisputable indicators of when it is safe to keep going, when you need to slow down, when you must stop. Imagine how much easier investing would be if you could rely on such green, yellow or red lights. Unfortunately, these unambiguous signals don’t exist. Investors fill much of the absence with anecdotes and gut feelings, which can be more powerful than you realize. Such soft indicators can help you make hard decisions, but only if you rely on them in the right ways. Gut feelings are really how people sense their internal milieu, which encompasses a multitude of different signals, coming from all over the place within the body. Evolution finely tuned our bodies to potential changes in risk and reward, preparing our ancestors for fight or flight in the presence of prey or predators. In today’s world, the same mechanisms make our hearts race, palms sweat and muscles tense up when we expect our portfolios to take a sharp rise or fall. The brain is constantly sampling and receiving all these signals, even if you’re not consciously aware of that. Such signals from the stomach activate regions of the brain that monitor arousal and motivate people to orient their attention. Such gut feelings—which scientists call interception—can shape our decisions even when we believe we are relying on data and logic. These intuitions are most reliable when they arise in stable environments where you get prompt, accurate and unambiguous feedback. Financial markets, however, offer a “wicked” feedback structure. You buy a stock at Rs100. It immediately goes to Rs120 as a famous investor/popular speculator discloses he/she bought it. You were right! Then it sags to Rs90, and another noted investor says he dumped it. Now you’re wrong! With such erratic feedback, it’s hard to educate your intuitions as professional athletes and other skilled performers do in stable environments. But your gut feelings will still feel powerful—precisely because the information you’re getting is in such flux. That’s especially true at a time like this, when most financial assets are overvalued by traditional measures and when nightmare and nirvana scenarios are both plausible.

The solution is to adopt rules and procedures that enable you to listen to your gut without being ruled by it. Don’t just heave a hunk of money at some new unknown stock because it’s “going to the moon.” Write down how likely, in a percentage range, you think it is to reach your target price by a certain date. List, in as much factual detail as you can, three reasons why. (If all you’re going on is a hunch, then write something like “I have a gut feeling” three times.) Finally, use your estimate of the probability you are right to determine how much you invest. When the target date arrives, check the outcome against your original forecast and reasoning and see if what you wrote down at the start can teach you anything about how to make your next investment. Did the stock price end up near your predicted price roughly when you expected? How much of your rationale was right? If all you went on was intuition, did it turn out to be reliable? A gut check just might keep your gut from hijacking your brain.

Quote of the week: “The individual investor should act consistently as an investor and not as a speculator.”

— Ben Graham

You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.

F&O / SECTOR WATCH

Mirroring the uncertainty in the cash market, derivative segment witnessed alternate bouts of buying and selling. Sharp stock specific moves dotted the trading pattern. NSE Nifty concluded with a minor loss of about half a percent, while the Bank Nifty experienced a more substantial decline of over one and a half percent. On the Option front, we have seen the Maximum Call open interest at 19,600 strike, followed by 19,500 strike. On the Put side, the Maximum open interest was at 19,400 strike, followed by 19,500 strike. In terms of Implied Volatility (IV), Nifty call options settled at 9.17 per cent, while put options concluded at 10.29 per cent. Additionally, the Nifty VIX, a measure of market volatility, concluded the week at 11.40 per cent. The Put-Call Ratio Open Interest (PCR OI) stood at 1.15 for the week. The above data indicates that 19,300-19,600 is expected to be the trading range for the Nifty in coming days. A decisive breakthrough on either side has the potential to offer further momentum in market indices. Taking open interest into account, the anticipated trading range for the Bank Nifty is between 44,500 and 44,000. Some risk-off sentiment is likely to prevail in the markets. The traditionally defensive pockets like Pharma, Consumption, IT, PSE, etc., are likely to display resilient performance. It is strongly recommended to avoid aggressive exposures and stay extremely stock-specific. While keeping leveraged positions at modest levels, a cautious and selective approach is advised for the coming week.

After the RBI policy announcement, the banking sector witnessed significant selling pressure, leading to a decline in the Bank Nifty. Fresh short positions have been observed in the F&O data with the trader’s strategy of selling on rallies. However, the PSU Banks are poised for a potential breakout, indicating a shift in market sentiment. It’s anticipated that the PSU Bank Index might outperform the broader Bank Nifty Index in the upcoming trading sessions. IT biggies have recently shown signs of reaching a bottom on the technical charts, implying a potential for further upward movement of around 3-5 per cent in the near term. Buy HCL Tech and Wipro. Realty stocks are poised for renewed buying interest after the recent changes in interest rate fixation for housing /auto loans in the RBI policy meeting. Buy DLF in the current weakness.

Stock futures looking good are Adani Enterprises, Bharat Forge, Deepak Nitrate, HCL Tech IRCTC, SBI and Wipro. Stock futures looking weak are Bandhan Bank, Bata India, Godrej Properties, Jubilant Food, MGL and Tata Chemicals.