Mkts may sustain momentum amid intermittent correction

Ignoring hints of a possible rate hike by the US Federal Reserve in its next policy meeting and buoyed by positive economic data, healthy provisional numbers by corporates ahead of the June quarter earnings and consistent buying by FIIs; market continued to rally for yet another week and benchmark indices posted record highs. The BSE Sensex closed the week ended up 562 points at 65,280, and the NSE Nifty climbed 143 points to 19,332. In the broader market, the Nifty Mid-cap and Small-cap indices gained 0.9 percent and 2.6 percent. Most of the sectors contributed to the up-move in the market. FIIs were net buyers to the tune of over Rs9,100 crore in first week of July, in addition to around Rs55,000 crore worth of buying in the cash market in previous two months. However, DIIs preferred profit booking with sales of nearly Rs6,900 crore worth shares in cash segment during the week ended. The CPI number for June, scheduled on July 12, is expected to remain largely flat compared to 4.25 percent recorded in May. Renewed weakness in rupee is becoming a concern. New demat account additions zoomed to a 13-month high in June, with investors looking to participate in the market rally amid the new highs. A surge in demat account openings during market rallies is a common occurrence, but also indicator of start of a “bubble”. The sharp 15 per cent rise in the Nifty from the March lows, coupled with news and stories surrounding the consequent wealth creation, is attracting new investors. New investors normally chase low-grade small-caps, which slowly run into the bubble territory. There are signs of this happening now. Seasoned investors should take this as a sign of caution. Electronics manufacturing services and solutions provider Cyient DLM will be making its debut on the bourses on July 10, while Kolkata-based Senco Gold will also be listing in later part of the next week, on July 14.The listing of Alphalogic Industries, Synoptics Technologies, Tridhya Tech, and Global Pet Industries will also take place in coming week. The momentum in the market may sustain despite possible intermittent consolidation and correction in the coming week, with focus on the macroeconomic data. Stock-specific actions are indicated as the corporate earnings season begins next week.

Listening Post: The Two Things to Do When the Stock Market Gets Crazy

Turbulent times can cause investors to make decisions they’ll later regret. Here’s how to stay afloat in these choppy waters without sinking your future. How much worse can it get? In the last three months of the current year it seemed as if the stock market could only go up, buoyed by a river of money that gushed from the FIIs. In the past week, on Friday that illusion has been shattered a bit. But what happens next isn’t the right question to ask. In a speech in 1963, the great investment analyst Benjamin Graham said: “In my nearly 50 years of experience in Wall Street I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”

You ought to do two things. First, put the market’s recent fluctuations in long-term perspective. Then, recognize that what kind of an investor you are matters more than which investments you own. Two factors had kept stocks rising smoothly until this month: Government policy and FIIs. And, whenever declines get steep, financial advisers put orders that mechanically purchase stocks as they fall below a target level. That has kept stocks from falling too far. Such smoothness can breed complacency. In what’s sometimes called “risk compensation,” you would likely drive faster down the hairpin turns of a mountain road if it has sturdy guardrails than you would if nothing stood between you and those deep ravines. The sense that the environment is safer can make you comfortable taking greater risks.

With so many of these stocks selling at hundreds of times their expected earnings, or not yet having any profits; and the recent data kindled a familiar fear—that signs of a hot economy would lead the Federal Reserve to raise interest rates higher than expected. Yet this was far from the first time stocks have taken a beating in recent years. The Nifty has closed down at least 1 per cent for the day 448 times since the beginning of 2008. Chances are, you barely remember those declines. Investors are exceptionally adept at retroactively revising their memories. No one likes to admit fear or to feel foolish or incompetent, so we polish our own pasts; what was terrifying then becomes not so bad now.

Investors should care about levels of wealth: how much money they have. Instead, they care about changes in wealth: how much they’ve just made or lost. How happy you would be about having Rs One million today depends largely on whether you had (say) Rs100,000 or Rs1.9 million last week. If you just made Rs900,000, having Rs One million is thrilling. If you just lost Rs900,000, having the same Rs One million will turn your stomach. That’s only natural. When you buy or sell stocks based on short-term market turmoil, the person you are trading with is your future self.

Remember: In every trade, there has to be a winner and a loser. So who is getting the better deal? If you have decades more investing ahead of you, then your future self is likely to be annoyed—or could even be materially impaired—by rash moves made now. When you convey money from your present self to your future self, “it’s a road several hundred miles long, full of potholes and icy patches and mountain passes.” You can easily skid off the road unless you drive very slowly and carefully.

It’s better to be too conservative and end up with a few rupees less than to overestimate your tolerance for risk and end up panicking and selling at the bottom. Bearing your future self in mind also means you have to embrace uncertainty. By historical standards, stocks are far from cheap compared to their long-term average earnings, adjusted for inflation. But stocks have been significantly overvalued, by the same measure, for most of the past 30 years. Had you abandoned stocks in 1992 and stayed out ever since, you would have missed out on a bonanza; stocks went on to grow at an average of roughly 13% annually over those three decades. One reason stocks tend to have high returns over the long run is to compensate investors for the ever-present risk of losing at least half their money in the short run. The prerequisite for being a long-term investor is, knowing whether you can accept that uncertainty.

Quote of the week:”It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros

Too many investors become obsessed with being right, even when the gains are small. Winning big and cutting your losses when you’re wrong are more important than being right.

F&O/ SECTOR WATCH

Ahead of the start of Q1 earnings season, derivative segment witnessed sharp stock specific moves. The corporate earnings season for the quarter ending June FY24 will be kicked off by the IT majors next week. Tata Consultancy Services and HCL Technologies will be the first to announce their numbers on July 12, followed by Wipro on July 13. In the option segment, the maximum weekly Call open interest is at 19,400 strike, followed 20,000 and 19,900 strikes. Maximum Put open interest was seen at 19,400 strike, followed by the 19,300 and 19,000 strikes.The maximum pain is at 19,400 strike where there is maximum Call and Put open interest. The implied volatility (IV) for call options concluded at 10.38 per cent, while put options closed at 11.29 per cent. The Nifty VIX, which measures market volatility ended the week at 11.84 per cent. The PCR OI (Put-Call Ratio Open Interest) settled at 1.42 for the week more than the previous week indicates more put writing. In the Bank Nifty, the maximum concentration of call and put open interest is at the 45,000 strike. Techies indicate that the 19,000 level also coincides with the 20-day EMA (exponential moving average - 18,995); so for initiating fresh longs, one should wait for the Index to stabilise around the 19,100-19,200 bands. Technically both the indices are still looking strong despite a heavy sell off seen on Friday’s session. Auto retail sales in June 2023 reported a 10 per cent y-o-y growth owing to positive performances across all vehicle categories including two wheelers, three wheelers, passenger vehicles (PVs), tractors, and commercial vehicles (CV). Reliance Industries (RIL) on Sunday announced July 20 as the record date for the demerger of its financial services arm Reliance Strategic Investments, which would be renamed later on as Jio Financial Services (JFSL).The demerger will unlock value for 36 lakh-strong shareholder base of RIL, India’s largest company by market capitalisation. As part of the plan, RIL shareholders will get one share of Jio Financial for every share they own of RIL. Stock futures looking good are BOB, Granules, JSPL, TechMahindra, Oberoi Realty, IOC and PNB. Stock futures looking weak are Atul, Aarti Inds, Bandhan Bank, IRCTC, IndiaMart, Marico and UPL.

(The author is a senior maket analyst and former vice- chairman, Andhra Pradesh State

Planning Board)