RBI policy to dictate mkts for near-term

Spooked by the US credit rating downgrade news, rising US bond yields, consistent FII selling, no positive surprises in corporate earnings and disappointing other global cues; markets continued their downward journey in the equity markets for the second consecutive week. The BSE Sensex corrected 439 points to close the week at 65,721 points, and the NSE Nifty declined 129 points to close at 19,517 points. The broader markets performed better than benchmark indices, with the Nifty Mid-cap 100 and Small-cap 100 indices gaining 0.7 percent and 0.8 percent respectively. With FII selling weighing on sentiment, bouts of profit booking and selling was seen in auto, banking and financial services, FMCG, and oil & gas stocks. After consistent buying since March, FIIs have turned net sellers in the Indian markets for August, especially after the spike in US 10-year treasury yield to over the 4 percent mark, causing a southward move in the equity markets. FIIs have net sold Rs3,546 crore worth of shares in the first week of August, but DIIs fully compensated by purchasing more than Rs5,600 crore worth of shares in the cash segment last week. In near term, the RBI policy commentary and the interest rate decision by Monetary Policy Committee (MPC) meeting due on August 10 will be the most important factor dictating the direction of the market. With increasing inflationary pressures specially concerns on food inflation; observers expect the RBI to turn extra cautious at the upcoming MPC meeting. Most experts expect the RBI to hold its repo rate at 6.5 percent and maintain its policy stance as a withdrawal of accommodation. Towards the end of June quarter earnings season, prominent companies like Adani Ports, Coal India, Hindalco Industries, Grasim Industries, Hero Motocorp, ONGC, Life Insurance Corporation, Tata Power, Bharat Forge, Siemens, ABB India, Aurobindo Pharma, Zydus Lifesciences, Nykaa, PFC, Zee Entertainment, Bata India, Berger Paints, IRCTC, Apollo Tyres, Biocon, Ipca Labs, Manappuram Finance, Samvardhana Motherson International, Apollo Hospitals, Glenmark Pharma, Jindal Steel & Power, NALCO, and Voltas will also announce numbers in the coming week. Stock-specific action will continue on the back of the last leg of quarterly earnings season. Markets are likely to move in a broader range with some volatility in interest-sensitive sectors.

Listening Post: Don’t Get Dazzled by Glittering Growth

When you pay too much for a dream stock, don’t be surprised if you end up with a nightmare. Over the past year, investors became increasingly excited over the hot performance—and even hotter future—of industries like Defence related ones, Railways related, Banks & NBFCs and some supposedly new generation stocks.

As the economist Max Winkler quipped in the late 1920s, investors often discount “not only the future but the hereafter”—meaning that the price they pay for their hopes is so high that they won’t make any money even if their hopes are realized. For many people, the sight of stocks doubling and tripling or more in a matter of weeks is too great to resist. But in order for a stock to possess “momentum,” it needs to have been going up faster than average over the past two to 12 months or so. If it has been on fire for just a few days or weeks, there’s no reason to believe its hot returns will persist, experts say. And the cheapest stocks with momentum do the best.When you hold speculative stocks at ultrahigh prices, you either win big or lose big. “This is investing with 1s and 0s”. “It’s on or off here.”

That is why diversification is so important. If you can’t resist the urge to chase fast-moving stocks, then you must hold cheap ones as well. “Momentum and value tend to diversify each other, going through good times and bad times at different times”.

If you steer clear of hope stocks, you can even use momentum “as a signal not to trade”. Studies of individual investors show that the stocks they buy perform worse than the ones they sell—almost certainly because investors buy too soon (before a falling price can make a stock even cheaper) and sell too early (while the price is still likely to continue rising). In fact, according to extensive academic research, stocks that have been rising for several months tend to keep going up for several more, while those that have been falling for several months tend to keep dropping.

So—as long as your recent winners remain reasonably valued—you should wait to sell, since momentum is likely to carry them higher for a while longer. By the same token, you can be patient in buying recent losers; let their recent downward momentum turn them into even greater bargains before you buy. That way, “you’re not incurring trades because of momentum”.

“You’re delaying trades because of it. “In short, hope is rarely under-priced on the stock market. The more you pay and the faster you rush to get it, the less you will end up with in the end.”

Quote of the week: “With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.”

— Carlos Slim Helu

It’s far too easy for investors to lose perspective. Whenever something big goes wrong, a lot of people panic and sell their investments. Looking at history, the markets recovered from the 2008 financial crisis, the dotcom crash, Covid pandemic and even the Great Depression, so they’ll probably get through whatever comes next as well.

F&O / SECTOR WATCH

On the back of the heightened volatility triggered by the US rating downgrade, derivative segment witnessed sharp spike in volumes. The Nifty index closed half a percent lower, while the Bank Nifty saw a decline of over one percent. The Options data shows Maximum Call open interest at 19,600 strike, followed by 20,000 strike, and the Maximum Put open interest was seen at 19,400 strike, followed by 19,500 strike.The implied volatility (IV) for Nifty call options concluded at 9.79 per cent, while put options closed at 11.01 per cent. Additionally, the Nifty VIX, which measures market volatility, ended the week at 11.19 per cent. The Put-Call Ratio Open Interest (PCR OI) settled at 1.16 for the week. Data suggests a very high accumulation of Call OI between 19,800-20,000 levels and this makes the zone a formidable resistance for the index. The VIX, which came off by 5.47 per cent on the last trading day of the week continues to remain at dangerously low levels. Despite the retracement that we saw, India VIX has risen by just 4.32 per cent on a weekly note. Weekly Option data indicates that 19,600-19,700 is expected to be the resistance area for the Nifty, whereas 19,400 points is likely to be an immediate support for the index. Considering open interest, the current expected trading range for the Bank Nifty lies between 45,000 and 44,500. Traders are advised to exercise caution and use strict stop losses, as the current volatility is quite low. Moreover, specific stocks are expected to exhibit movement within the Nifty, while the Nifty trading range for the upcoming week is anticipated to be between 19400 – 19800 levels. A decisive breakout on either side could provide further direction to the market indices. Sectoral wise, the IT and Pharma sectors experienced significant gains. Among the IT biggies, renewed buying interest from FIIs was seen in HCL Tech and Wipro. From the pharma pack, the Hyderabad quadrant Aurobindo Pharma, Laurus Labs, Dr Reddy and Divi Labs witnessed steady buying interest. After the deleveraging in recent years, Realty stocks are back on the radar of institutional investors. DLF and Oberoi Realty are debt free now. Stock futures looking good are Balrampur Chini, Container Corporation, Canara Bank, Jubilant Foodworks, Marico, Petronet LNG and Voltas.Stock futures looking weakare ABFRL, BPCL, Godrej Properties, Vedanta, RBL Bank and UPL.

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